Regulators Call for Annuity Income Guarantee Scrutiny

By Linda Koco
Contributing Editor, AnnuityNews

A group of state regulators has recommended that annuity products that provide guaranteed income benefits in innovative ways be classified as hybrids.

This development should be of strong interest to producers and distributors as well as carriers, because one of the affected products is a top seller -- the guaranteed lifetime withdrawal benefit (GLWB) rider, which is often sold with a variable annuity (VA). The rider guarantees that at least a specified amount can be withdrawn annually, for life, regardless of market performance.

The regulators want to label the GLWB inside of VAs (and similar products) as “hybrid income annuities,” or HIAs. In addition, they want to label a similar but still emerging product, the contingent deferred annuity (CDAs), as “synthetic hybrid income annuities,” or SHIAs. And they want a new working group to be formed at National Association of Insurance Commissioners (NAIC) to “review and develop recommendations for HIAs and SHIAs, specifically around solvency and consumer protection-related issues.”

Whether new regulations will result remains to be seen. But the flavor of the recommendations suggests that regulators are definitely starting to look at annuities with innovative lifetime income guarantees in a new way.

For instance, in announcing the recommendations during a conference call last week, Felix Schirripa mentioned that GLWBs are no longer the ancillary features in VAs as they were thought to be 10 years ago.

Schirripa is chief actuary in the New Jersey Department of Banking and Insurance and chairman of the CDA Subgroup of NAIC’s Life Actuarial Task Force (LATF). The subgroup is the regulatory group that developed the above recommendations.

Schirripa has a point about GMWBs not being ancillary. In the VA world, they are commonplace even though they are offered as options. In third quarter 2011 alone, GLWB riders were elected 57 percent of the time when offered with a VA, making them the most popular guaranteed living benefit rider, according to LIMRA.

Those sales results mean that producers — and their customers — are making ample use of the riders. In fact, for some annuity professionals, the rider and the policy have become so entwined in the mind that they have begun to refer to the contracts as VAGLWBs or VAGLBs, within industry circles.

The results also mean that carriers are providing more and more of these guarantees.

An important factor in the growth in GLWB sales has been the rising demand for guarantees among consumers. Numerous surveys have found that Americans are clamoring for guarantees in their financial products, including their retirement income products. Producers who want to meet the demand have asked their distributors and carriers for products with guarantees, and the carriers have responded with a variety of solutions, especially for meeting guaranteed income needs.

Hence, the GLWBs and their siblings, the guaranteed minimum income benefit (GMIB) riders, and their first cousins, the CDAs. (CDAs are lifetime income guarantees that attach to investments that the carrier does not own or manage. The investments could include assets in a 401(k), a mutual fund account or a managed money account. The products start paying their guaranteed monthly income stream once the investment account is depleted.)

From a distance, it appears that all that innovation, along with the sales activity, contributed to NAIC’s decision to study the products, especially the newest innovation, the CDA, via the subgroup format.

Surprising turn

That the subgroup decided to include GLWBs in its recommendations was a surprising turn of events. After all, a key part of the subgroup’s mission had been to determine whether the CDA is an annuity or perhaps financial guaranty insurance.

Instead, the regulators decided that CDAs are a lot like VAs with GLWBs (and similar riders) and that both types of annuities should be labeled as hybrids, the HIA and SHIA mentioned above, and that LATF should form a working group to develop the recommendations mentioned above for these products.

“The charges of this working group did not include issues related to variable annuities with guaranteed living benefits,” pointed out insurance executive Lee Covington during the conference call. Covington is senior vice president and general counsel of Insured Retirement Institute (IRI).

In addition, he said that VAs with GLWBs have been sold for several years, and “there has been no question about the solvency standards for this product.”

Schirripa responded that the LATF had asked the subgroup to comment on CDAs. That inquiry led the subgroup to ask, “what about hybrid income annuities (the VAs with GLEBs)?” he said.

The study and conference calls that ensued led the regulators to conclude that “the question was framed incorrectly,” Schirripa said. “We want to reframe the issue and revisit some of these things that have been discussed many years ago, because these are different times.”

Earlier, he said that “we want to look at the designs and make certain that (they) are achieving what was promised to the consumer.”

He also said that “we decided we needed new terms” for both products.

“This just the beginning of the recommendations,” Schirripa said. “There will be a lot more meat attached to them in a week or so.”

Tweaking ahead

As of now, it appears that the regulators do not envision a ground-up drafting of new regulations involving features and products. Instead, the regulators seem to be proposing updating existing regulations with tweaks along the way.

As Schirripa explained, the subgroup has concluded that if hybrid income annuities can be sold by life insurers, then so can synthetic hybrid income annuities. Furthermore, he said, “the majority of subgroup regulators agree that much of the regulatory structure is already in place.”

Embellishing on those points, Schirripa said that, “the regulatory structure we have for the GLWB would be the starting point for us to continue do to more digging. Our recommendation will be (for LATF) to establish a working group to review and develop recommendations for both the hybrid and the synthetic (products), specifically around solvency and consumer protection-related issues.”

The subgroup has some findings that suggest, “it’s time to take a deeper dive and look at the solvency much more carefully,” he explained.  In addition, he said, “current consumer protection issues are not fully addressed in the existing rules.”

Schirripa pointed the finger at product innovation as a key reason for the need for the “deeper dive.” Such innovation “tends to be a little faster than the regulators,” he said.

That last was a reference to a point Schirripa made more than once during the conference call. This point has to do with the GLWB riders in variable annuities.

When the GLWB features first came out about 10 years ago, the riders were viewed as ancillary to the variable annuity product, he indicated. But now “we are seeing more market risk than had been realized,” Schirripa said. So the subgroup wants to “go back and think through the capital and reserving requirements, and think about the prudence of perhaps setting some exposure limits on the amount of capital that could be allocated to this one risk.”

Doing that “wasn’t important 10 years ago, but it’s important today,” Schirripa maintained.

The subgroup will present those recommendations to the LATF at NAIC’s spring meeting in New Orleans, in early March.

In 2010, 40 insurance companies were actively selling variable annuities, according to Morningstar figures shown in the 2011 IRI Fact Book.

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].