NAIC Considers Doubling 10-Year Minimum For Illustration Indices

By John Hilton

A National Association of Insurance Commissioners' working group put a strong proposal on the table Thursday to double the time indexes must be in existence to be used in annuity illustrations.

The proposal put forth by John Robinson of Minnesota would double the time indexes must be in existence from 10 to 20 years. The Annuity Disclosure Working Group is concerned that consumers are being misled by unrealistic indexed annuity illustrations.

But some industry representatives on a Thursday conference call said the 20-year requirement would go to far. Brenden Sheehan of Allianz said it would eliminate about 70 percent of the indexes currently being used.

The index illustration issue rose in importance as many insurers developed their own proprietary indices in recent years to respond to the popularity of indexed annuities with cautious clients. These indices rely on other indexes to create a hypothetical historical record of return.

Since the illustrations are ultimately relying on a mismash of indices, commissioners say a longer historical record is needed to account for the full economic cycle. The past ten years featured nothing but strong bull market returns, commissioners noted.

"We’re wondering if there’s some middle ground," Sheehan said. "If you went back, say 15 years, you would still include the financial crisis. ... And that would be inclusive of about 70 percent of the indexes that are available."

The 20-year change was advocated by Birny Birnbaum, executive director of the Center for Economic Justice. Consumers don't read disclosures and don't understand that a max 10 percent return, for example, is just the best-case scenario.

"If we took a hundred consumers and presented them with some of these illustrations that we are talking about," Birnbaum said of the max number, "I would be astounded if 99 out of 100 didn’t come away thinking that this is the amount that they expect to come away with from their annuity."

In fact, going beyond 20 years would be an even better way to "meaningfully address the issue" of misleading illustrations, Birnbaum said.

The group wrapped up the call by agreeing to expose the draft changes for comment for up to 45 days. Industry representatives said they would be studying the proposed changes and making comments.

“This is a very significant change from the current model," said Roberta Meyer, vice president and associate general counsel with the American Counsel of Life Insurers. "We hope that you will do what you’ve been doing and carefully consider what you are doing."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.