If you haven’t heard much about contingent deferred annuities (CDAs) lately, it’s not for lack of regulatory scrutiny. And it’s not because they’ve faded from the marketplace.
In the last few weeks, a committee of regulators has held two conference calls on proposals on how states can regulate the still new and evolving products. Their plan is to air some of the results at the National Association of Insurance Commissioners (NAIC) fall meeting this month.
A CDA is a longevity product that is somewhat similar to a guaranteed lifetime withdrawal benefit. It guarantees a lifetime income stream after the underlying assets are depleted through systematic withdrawal and/or other specified factors. The product attaches to securities (such as mutual funds) that are owned by the client, not the insurance company.
NAIC’s understanding is that carriers have been registering the products with the Securities and Exchange Commission. As such, today’s CDAs must be sold by registered financial professionals through licensed broker/dealers or by registered investment advisors.
It is clear that sales have been slow to date. However, they do exist. As of year-end 2013, for instance, five insurers were reportedly selling the products. The combined account value that year was $46.6 million for covered contracts, wrote Anne Obersteadt in the April 2014 issue of the CIPR newsletter, which is published by NAIC. Obsersteadt, a researcher in NAIC’s Center for Insurance Policy and Research, said CDAs began emerging in 2008.
Proponents believe the sticking point that’s inhibiting greater sales is the regulatory uncertainty. For that reason, what NAIC does or does not do concerning the products has gained increased importance for the industry.
The NAIC began looking at CDA regulatory issues about two years ago. The work started because some state regulators found themselves reviewing CDA designs that did not align with regulatory regimes for other types of annuities. Some regulators weren’t even sure the products were annuities. And some hesitated to approve the products without knowing more about them.
NAIC assigned the task of unpacking all this to its Life Insurance and Annuities (A) committee, which then set up the CDA (A) Working Group to dig in.
During its most recent conference call late last week, the working group reviewed a 10-page “Draft Guidance Document” that it has been developing. Titled Guidance for the Financial Solvency and Market Conduct Regulation of Insurers Who Offer Contingent Deferred Annuities, it includes an NAIC-approved definition of CDAs, a backgrounder on CDAs, and a lengthy review of the financial and non-financial regulation of CDAs.
If this document, or a variation of it, ultimately gets NAIC approval, this could mark a turning point of sorts in CDA history. That’s because it would provide the direction that some states have been seeking from NAIC about how to approach CDA regulation.
The regulators are pretty clear about the role of this document. If approved, it would serve as a reference for state regulators, not as a NAIC model regulation. It is something that states could consult if, say, they are interested in modifying their annuity laws to clarify applicability to CDAs or if they want help in determining how to apply existing annuity laws and rules to CDAs, according to the document.
Earlier, the working group developed, and the NAIC and approved, an official definition of CDAs. That cleared up one very pressing question that some regulators had.
The definition says this type of annuity “establishes a life insurer’s obligation to make periodic payments for the annuitant’s lifetime at the time designated investments, which are not owned or held by the insurer, are depleted to a contractually defined amount due to contractually permitted withdrawals, market performance, fees and/or other charges.”
Currently, the working group is considering whether to include the definition in various NAIC model regulations that mention annuities. These include NAIC model regulations on producer licensing, disclosure, suitability and advertising, among many others.
The commissioners are also examining whether and how those and other existing models apply to CDAs; and what options the industry can offer for consumers whose CDAs get cancelled due to actions of the insurer or a third party.
Other notes from the last CDA conference call:
- Producer education on CDAs will be likely be included in the mandatory four-credit continuing education training that is required under the Suitability in Annuity Transactions model regulation (Model 275).
- There is currently no model Buyers Guide for CDAs.
- The working group says it has determined that CDAs do not fit neatly into the category of fixed or variable annuities, although the products have characteristics of each. Instead, the group wrote in the draft guidance, the CDA “belongs in its own category.” In fact, the products have already been added as a filing category in the System for Electronic Rate and Form Filing (SERF).
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