NAIC Focuses On Proprietary Indices In Annuity Illustration Discussion

State insurance commissioners are wrestling with rules that would allow insurers to illustrate indexed annuities using indices that have been around less than 10 years.

The Annuity Suitability Working Group held a conference call this week, which produced additional tweaks to Annuity Disclosure Model Regulation 245. The group is a National Association of Insurance Commissioners committee.

The model Regulation 245 allows illustrations only if an index has been around at least 10 years. Insurers say that isn't a necessary requirement if its components have been around that long.

The 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.

Insurers are not wrong, said Bobby Samuelson, former senior vice president of product development for Brighthouse Financial.

"I think there’s a lot of validity to saying that even if the index itself hasn’t been around for 10 years, if the constituent parts of it have been, then you can pretty accurately recreate historical performance even if the index itself did not exist," said Samuelson, executive editor for The Life Product Review, an industry product evaluation service.

Two significant proposed changes are:

• Indexes in existence less than 10 years can be illustrated if: all of their components have existed for at least 10 years; the index value is calculated according to an algorithm that is not subject to discretion; and if the insurer is affiliated with the index provider, indexes published by that index provider are also used by entities unaffiliated with the insurer.
• Indexes in existence less than 10 years must include the following disclosures on the first page of the illustration in bold, or a different color type: the date the index was created; notice that the components have existed for at lest 10 years; notice that the index values are based on a algorithm that does not change; notice of the insurer's relationship to the index provider, if any; notice that any estimates on how the index would have performed before its creation are hypothetical and based on past performance of the components; and notice that future results will be different from the index's past performance.

While in agreement that using the components is a valid illustrating method, it isn't a foolproof replacement for historical performance of an index, Samuelson said.

"Any sort of issue with the index construction that would only exist in extreme scenarios will actually show itself in historical data, but will not show itself in back-tested data," he explained.

Rhode Island is also opposed to the change by amendment, wrote Sarah Neil, senior insurance analyst for the Rhode Island Insurance Division.

"This is a substantive change which would need to be addressed via a full change to the model, with the deletion of the language prohibiting the illustration and the inclusion of replacement language," she wrote in a May 15 comment letter.

Comments on the draft rule change are being accepted through July 1, an NAIC spokeswoman said.

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.

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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.