FA Illustration Rules Take Hold In Iowa

By Linda Koco
AnnuityNews

Iowa’s new annuity disclosure regulation, complete with precedent-setting illustration regulations for fixed annuities, has been in effect since Jan. 1 but, so far, the Iowa Insurance Division has received no complaints about infractions.

Given that the illustration regulations had a number of detractors during the proposal stage, this represents a fairly smooth transition to the world of compliance with fixed annuity illustrations.

The regulations are voluntary, meaning that fixed annuity carriers are not required to provide illustrations in Iowa, but if a carrier does provide fixed annuity illustrations, the company must comply with the new rules.

The illustration regulations form a big chunk of the newest version of the Annuity Disclosure Model Regulation (No. 245) that National Association of Insurance Commissioners (NAIC) adopted over a year ago, in October 2011.

Iowa is first

Iowa is the first—and, to date, only—state to implement the revised model, which updates NAIC’s earlier standards for disclosure of minimum information to annuity consumers. The state adopted the NAIC model in April 2012, made them effective on Jan. 1 and expects full compliance on or after July 1.

Jim Mumford, first deputy insurance commissioner and securities administrator for the state, said two or three other states have indicated that they also plan to adopt the new NAIC disclosure model. However, there is no projected timetable for that, so Iowa is the national focal point for now, with most industry attention centered on how the illustration regulations are working out.

There were, and still are, questions about how the Iowa Division will interpret the rules. In response, the Iowa Insurance Division released Bulletin 13-01 in April as “guidance to insurers and producers.”

The biggest question so far is, “what does the Iowa Division consider to be an illustration?” Mumford said. The answer appears in section III C of Iowa Bulletin 13-01.

For something to be an illustration, the bulletin states, “three elements must be present: 1) A personalized presentation or depiction; 2) [Must be] prepared for and provided to an individual customer; and 3) The presentation or depiction must contain the non-guaranteed elements of an annuity contract.”

If any one of those three elements is missing, the bulletin says, “it is not an illustration for purposes of these rules, and these rules do not apply.”

How the annuity works

“We want the illustrations to show how fixed annuity contracts work, not the values the consumer can expect to receive,” Mumford explained.

The new bulletin puts a little more detail on that, saying that, as a general principle, “Illustrations are to be used to demonstrate how the product works, and not to be used to compare to products against each other except as to how the contract features work.”

So, performance competition by ways of illustration spreadsheet seems to be definitely out.

There are some other defining points, too. For instance, illustrations must be specific to the annuity contract, and illustrations must be “concise and easy to read.”

There is also a heads-up for producers who might want to present illustrated content orally rather than on paper: “An oral presentation of personalized values is an illustration and subject to the regulation.”

The bulletin has numerous other pointers as well. For instance, annuitization must be illustrated; and a positive and a negative scenario should be shown for products subject to market value adjustment. It includes technicalities—for instance, guidelines on treating account value versus index value methods. And it shows some teeth (violations will be considered unfair trade practices and prosecuted accordingly).

The focus is on fixed

Mumford stressed that the regulation and interpretive bulletin address illustrations in fixed annuities, traditional and indexed. The rules are not for variable annuities, he said, because variable annuities are securities, regulated by the Financial Industry Regulatory Authority (FINRA), and subject to FINRA’s illustration rules and guidelines.

Some fixed carriers had reportedly said they would stop offering fixed annuity illustrations in state that implement illustration regulations. Other carriers said the opposite, at least privately. In Mumford’s estimate, “it’s a standoff right now.”

Still, there is no hard data on how many companies are offering fixed annuity illustrations. Carriers don’t seek approvals for their illustration approach, Mumford noted, and there is no formal data-gathering about illustration usage trends, at least not yet.  Munford’s guess is that “the companies are still sorting this out.”

New fixed annuity environment

Mumford said he believes a new environment for fixed annuities is in the making, in part because of the illustration regulations and also because of two other regulatory initiatives from NAIC.

In 2010, he pointed out, NAIC adopted the NAIC Suitability of Annuity Transactions Model Regulation.  In late 2011, it adopted the new disclosure model that includes the illustration regulations. And in early 2013, NAIC committees put the finishing touches on a substantially updated Annuity Buyer’s Guide.

“When all are in place, the annuity market will be more consumer based, and the regulations will be such that consumer can understand what they are buying,” Mumford contended.

That won’t be for a while, though. While 30+ states have adopted the suitability model, only one has adopted the new annuity disclosure model (and only 16 or 17 states adopted NAIC’s original annuity disclosure model). In addition, although most states have adopted earlier versions of the NAIC Annuity Buyer’s Guide, no state as yet has adopted the updated Annuity Buyer’s Guide which is expected to be approved this year but which is still pending before the NAIC Plenary.

However, the horses are in front of this particular cart, and they are going in the same direction. So Mumford’s prediction just might come to pass.

Linda Koco, MBA, is a contributing editor to AnnuityNews, 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].