NAIC regulators begin consensus phase on annuity illustration overhaul

A National Association of Insurance Commissioners' working group is moving into a new phase of its effort to overhaul annuity illustration rules, shifting from collecting ideas to building consensus on potential changes to Model Regulation 245.

The Life Insurance and Annuities Illustrations Working Group held the first of four conference calls on Thursday, designed to reach a consensus on the difficult illustration rules.

Chairman Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce, said the goal is to develop technical proposals after the upcoming NAIC Summer National Meeting in Columbus, Ohio.

"We're at the point where we can start to try and build consensus to make some conceptual decisions, piece by piece," Castaneda said. "If we can't do it in four calls, we'll schedule more than four calls."

The working group plans to address illustration length, disclosures, accountability and illustrated crediting rates before considering whether an interim actuarial guideline or other temporary measure is needed. At the same time, states adopt revisions to Model 245.

The parent Life Insurance and Annuity Committee gave the working group the go-ahead last month to begin revising Model 245. The Executive Committee is expected to vote on final approval during the summer national meeting, Aug. 11-14.

Focus on illustration length

The group's first substantive discussion centered on reducing the size and complexity of annuity illustrations.

Among the concepts under consideration are allowing or requiring shorter illustration periods instead of projecting values through maturity, eliminating redundant narrative sections and combining multiple illustration tables into more compact side-by-side presentations.

“In our research, we've seen multiple illustrations that are 30 pages of quantitative information,” Slutsker said. “If we can just have a table that's a little bit more compact, it just is a bit less daunting.”

Working group members generally supported simplifying illustrations but cautioned against creating loopholes.

Tomasz Serbinowski, an actuary with the Utah Insurance Department, warned that companies could potentially extend illustration periods by adding immaterial product features that begin decades into a contract.

“It invites some possible gaming,” he said.

Several regulators spoke in favor of standardized illustrations, saying simpler, more uniform presentations would better serve consumers nearing retirement.

“If these are actually intended to be used as educational documents, there's no reason that we can't work to standardize them,” said Joshua Blakely of Oregon, “which I think overall would help the consumers' understanding if they're trying to compare products or just understand how one product works versus another.”

The working group eventually reached preliminary consensus to pursue shorter and combined illustration formats while emphasizing standardized requirements rather than leaving presentation largely to company discretion.

Debate over disclosures

The group then turned to disclosure requirements, examining proposals to strengthen warnings that illustrations are not projections, expand disclosures about anticipated changes in non-guaranteed elements, add standardized disclosure language and further distinguish guaranteed from non-guaranteed values.

Model 245 already requires disclosures stating that illustrated values are not guarantees and that non-guaranteed elements may change, raising the question of whether additional language would meaningfully improve consumer understanding.

Several regulators questioned whether adding more disclosures would solve the underlying problem.

“I'm generally not in favor of adding to disclosures,” Serbinowski said. “I don't view disclosures as particularly useful.”

Mike Yanacheak is the chief actuary at the Iowa Insurance Division. Consumers often become anchored to large illustrated account values regardless of cautionary language, he explained.

"When you show a consumer an illustration that says, 'At some future point you're going to have 10,000 times the amount of money you've got now,' they're already anchored," Yanacheak said. "It doesn't matter what you say in your disclosure. They've already got the concept in their head that they're just flat out going to be rich.”

Yanacheak also pointed to existing Model 245 language requiring illustrations to reflect anticipated changes in non-guaranteed elements, adding that he rarely sees companies incorporate expected future changes into their illustrations despite the existing requirement.

“I've never seen this language in Model 245 respected and taken into account,” he said. “I'm not saying it hasn't happened. I've just not seen it.”

Consumer advocates urge testing

Consumer representatives urged regulators to test any proposed revisions with actual consumers before finalizing new requirements.

Bonnie Burns, a training, policy, and technical assistance consultant at California Health Advocates, said disclosures remain important but should be evaluated based on how consumers actually experience them.

Burns also argued that consumers consistently want information about insurers' financial strength, even though regulators suggested setting that issue aside because of its broader implications.

“Almost every person who comes in for counseling on insurance of any kind, one of the things that they want to know is that company strong enough that it's going to be there later,

Dick Weber is CEO and co-founder of the Life Insurance Consumer Advocacy Center. He said consumers tend to form expectations based primarily on the illustrated numbers rather than accompanying explanations.

"The numbers form an immediate expectation," said Weber, also an NAIC consumer liaison. "I don't think yet another disclosure is going to do it."

The working group is expected to continue discussing disclosure issues and later move into the more technically complex questions surrounding illustrated crediting rates and hypothetical returns during upcoming calls.

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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 [email protected]. Follow him on Twitter @INNJohnH.