CDAs May Get Consumer Protection Scrutiny

By Linda Koco
InsuranceNewsNet

State insurance regulators are proposing to put consumer protection issues clearly under the regulatory microscope where contingent deferred annuities (CDAs) are concerned.

The news comes in the wake of last week’s complaint from the Center for Economic Justice that CDAs are “dangerous” for consumers. The center had called for the National Association of Insurance Commissioners (NAIC) to scrutinize potential consumer protection issues related to the products.

During NAIC’s summer meeting Sunday in Indianapolis, regulators responded. They drafted some suggested changes to CDA-related proposals that effectively would bring consumer protection issues to the forefront.

A CDA is a type of insurance contract issued by life insurers. The products function much like living benefits features in variable annuities, except that CDAs are attached to separately-managed retirement accounts such as mutual funds. 

Attention

CDA products are getting attention because they are fairly new, and there is uncertainty over how they fit into the annuity infrastructure and how to regulate them. Hence, there has been ongoing regulatory inquiry.

In a sharply-worded comment letter submitted to NAIC last week, the Center for Economic Justice had contended that proposals contained in a CDA report submitted to NAIC’s Life Insurance and Annuities (A) Committee did not include a charge to NAIC bodies to review consumer protection standards related to CDAs.

Instead, the center wrote, the charges “appear to be oriented towards clearing any regulatory hurdles for the CDA instead of identifying dangers to consumers and pro-actively stopping consumer harm.”

The center asked NAIC to appoint a new working group to address “potential consumer protection issues” associated with CDAs and to make “recommendations for consumer protection requirements related to the sale and administration of CDAs.”

The A Committee didn’t do exactly that, but it did tinker with some “charges” in the original report, with an eye toward beefing up regulatory inquiry into consumer protection issues. The proposed changes include two that are particularly noteworthy:

Guidelines: The committee proposed that NAIC’s CDA Working Group be tasked with developing “NAIC guidelines and/or model bulletin” on the products. The purpose would be to serve as a reference for states interested in modifying their annuity laws to clarify their applicability to CDAs for this purpose.

The original proposal had only called for the working group to develop a white paper for this purpose. This shift is subtle but it could have impact on the CDA market, if it is adopted.

That’s because NAIC guidelines and model bulletins may have more influence over regulatory trends and standards than do NAIC white papers. The latter are informative in scope but do not necessarily lay out detailed suggestions for regulatory language. And, although state regulators are not required to use NAIC guidelines or model bulletins, some do use them as a basis for their own regulatory work, so the suggested guidelines and bulletins many have more long-lasting effect on regulation — in this case, of CDAs.

This takes on consumer protection heft in light of the second proposed change to the working group’s charge, as follows.

Review existing models.  The committee proposed that its CDA Working Group should also, “as part of its work, review existing NAIC model laws and regulations applicable to consumer protection issues associated with CDAs.”

The original proposal had no such wording, although the working group’s overall charge for 2013 does require the group to “Evaluate the adequacy of existing laws and regulations applicable to the solvency and consumer protections of annuities as such laws are applied to CDAs.”

By adding this language to new proposed charges for the working group, the A Committee may be saying that it wants the working group to continue or expand its work in this area going forward. If so, this would not be a new CDA Working Group, as the center had requested. However, the existing group would likely undertake deeper or more focused study of the issue — and its guideline development (as discussed above) probably would reflect that focus.

Open for comment

These and other proposed changes are not a done deal. The A Committee is leaving the changes open for comment until Sept. 10. The committee says it will post the comments on the NAIC website. 

Changes to charges and proposals are routine parts of NAIC regulatory development. However, the annuity industry is keeping a close eye on the proposals regarding CDAs because the changes could, if adopted, influence not only the direction of regulatory thinking on the products but also the timeline for certain issues to be resolved.

Those influences could, in turn, impact CDA product development, features, reserving, distribution, sales and many other aspects of the developing business line.

Some advisors could be impacted as well. As a 216-page study on the life insurance industry recently published by NAIC’s Center for Insurance Policy and Research points out, given the large volume of money in mutual funds, separately managed accounts and fee-based products sold by brokers, “the CDA market has the potential to significantly boost insurers’ sales volumes. [And] while advisor interest in annuities has been weak in recent years, the increase in demand for guaranteed income protection in retirement could reverse the trend.”

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].