New CDA Flap: Where’s The Protection?

By Linda Koco
InsuranceNewsNet

The consumer-oriented Center for Economic Justice wants state insurance regulators to add a consumer protection review to their evaluation of continent deferred annuities (CDAs).

The trigger for the request is some recommendations the regulators are considering this weekend at the summer meeting of National Association of Insurance Commissioners (NAIC) in Indianapolis.

The recommendations propose “charges” to various NAIC bodies, the purpose being to frame out a path for regulating CDAs, which are still relatively new and a bit of a puzzle for state insurance regulators.

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

In a sharply-worded six-page comment letter sent to NAIC’s Life Insurance (A) Committee, which will hold a session on CDAs on Aug. 25, the center maintains that the products are “dangerous” for consumers.

The center contends that the proposed recommendations do not include a charge to NAIC bodies to review consumer protection standards related to CDAs. Instead, it says, 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.”

It asks NAIC to appoint a new working group that will address “potential consumer protection issues” associated with CDAs.

The proposed working group would be tasked not only with identifying the consumer protection issues but also with making “recommendations for consumer protection requirements related to the sale and administration of CDAs,” according to the center.

Previous CDA studies

Normally, a call for creation of a new NAIC working group is not a headline-making event. NAIC establishes working groups on state insurance developments and regulations all of the time.

But this particular call from the Center for Economic Justice comes in the wake of two initiatives that NAIC has already undertaken to study CDAs. First there was a subgroup study. Then, in 2012, the A committee created a CDA Working Group on the products.

The working group was charged with evaluating “the adequacy of existing laws and regulations” as applied to CDAs and with determining ”whether additional solvency and consumer protection standards are required.”

The group completed its work in April and submitted 15 or so recommendations to the A Committee. These are the recommendations the committee will air this weekend.

The question now is: will the NAIC establish yet another CDA working group?

The link to variable annuities

The center maintains that CDAs are “dangerous” for consumers—“more dangerous than long-term care(LTC) insurance or variable annuities with guaranteed lifetime withdrawal benefits (GLWB).”  [The latter products are annuities to which CDAs are often compared due to the fact that they pay out benefits contingent on the underlying account being exhausted.]

The center includes in its comment letter a lengthy discussion of how carriers writing variable annuities with GLWBs have in recent times imposed requirements or restrictions on owners of those products.

These changes to product altered the basic value of the policies, “long after consumers had an option for an alternative investment,” the center contends, predicting that this will happen with CDAs, too. “Insurers will remove profits for 10, 15, 20 years and then, when there is greater than expected benefit requests, insurers will change the product in a way that destroys the value of the product for consumers who will no longer have the opportunity to make an alternative investment.”

It is “incomprehensible,” the letter said, “that regulators are allowing an even riskier product – the CDA.”

The CDA Working Group seems to have anticipated potential concerns about consumer protection issues.

In the final recommendation of its report to the A Committee, the working group writes: “To the extent there are additional state consumer protection or market regulation laws which apply to annuities that the Working Group did not specifically address, the Working Group recommends that states presume those laws would apply to CDAs unless, upon analysis, application of the regulation to CDAs is unworkable or unwarranted.”

That doesn’t say the same thing as the center’s call for a new working group to review consumer protection standards. However, the implication is that the working group believes it has addressed consumer protection issues.

Of interest to producers

Although regulatory issues surrounding CDA products are of high interest to the few carriers that currently design and sell the products, insurance producers have a dog in this fight too. That is because some of the recommendations from the DCA Working Group do involve, or could impact, producers.

For instance, one recommendation calls for a review of the types of licenses that producers may be required to hold in order to sell contingent deferred annuities (CDAs). This review would, according the recommendation, “determine if those licenses are consistent with the licenses required to sell variable annuities and recommend any necessary changes and/or revisions.”

A few other recommendations that may be of interest to producers include:

·         Appoint a new group to review and consider revisions to the Annuity Disclosure Model Regulation to exempt Securities and Exchange Commission-registered CDAs and CDAs offered through ERISA retirement plans.

·         Appoint a new group to review and consider revisions to the Suitability in Annuity Transactions Model Regulation to reference its applicability to the sale of CDAs, including the one-time, four-hour training and the product-specific training requirements.

·         Appoint a new group to review and consider revisions to the Life Insurance and Annuities Replacement Model Regulation to reference its applicability to CDAs.

·         Consider revising the Standard Nonforfeiture Law for Individual Deferred Annuities to exclude CDAs from the scope of the model.

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].