NAIC Regulators Look To Tighten Up RILA Product Designs

Among insurers and annuity sellers, the rise of indexed-linked variable annuity products provided a lifeline to an industry beset by persistent disruption in recent years.

Among regulators, the ILVA products proved a source of bewilderment. Although many regulators classified them as variable annuity products, others were not convinced.

Finally, in mid-2021, a National Association of Insurance Commissioners task force created a subgroup to focus solely on the index-linked annuity products, also known as RILAs [registered indexed-linked annuities]. The subgroup developed an actuarial guideline for technical changes to ILVA values that would bring the products in line with traditional VAs.

Based on the first comments on the proposal, the industry is not on board with the changes. The subgroup met Wednesday to discuss the initial feedback.

For starters, the AG proposal "could be interpreted" to require that the profit provisions, spread and expenses be presented as a fee disclosed in the contract, which differs from the design of the ILVA products that are selling so well, Prudential wrote in a comment letter.

"The main consideration that the [AG proposal] should address is that the ILVA product is fundamentally designed as a spread-based product and not as an explicit fee product," wrote Jonathan Clymer, vice president and actuary for Prudential. "The explicit fee approach would remove simplicity and result in an unnecessary disruption to the ILVA marketplace and impact consumer product choice."

No Good Fit

ILVA products charged onto the scene in 2018. Sales climbed 55% in 2019 and another 38.5% in 2020, according to the Secure Retirement Institute, as new carriers and products rushed into the market. Also known as buffered or structured annuities, the products offer returns based on the performance of an underlying index.

But those returns are not directly invested in the market, thereby reducing the risk of direct exposure to equities, while maintaining the crucial upside potential.

The quandary for regulators came when the ILVAs did not exactly fit two key model laws: Model 250, Variable Annuity Model Regulation, and Model 805, Standard Nonforfeiture Law for Individual Deferred Annuities.

The former sets the nonforfeiture rules, or the rules that determine how much money a contract holder can get back if they give up the annuity, for traditional VAs. The latter set the nonforfeiture rules for fixed annuities.

The new indexed-linked annuities did not fit neatly into Model 250 because their daily values are not based on the value of units of a separate account. Rather, the daily values are based on formulas set forth in the contract.

In a client alert, the law firm Carlton Fields explained how the ILVA formula works:

• At the end of the index option term, looks to the performance of one or more indexes.
• During the index option term, may take into account the time remaining until the end of the index option term, the change in market value of the assets used by the insurer to hedge its obligations to pay the index-based interest, the change in a hypothetical asset pool that replicates the insurer’s hedges, and/or the actual change in the index to date, including the full loss to date.

Although similar types of formulas are used in many indexed-linked annuity products, there is variation on how interim values are determined among the ILVAs, the law firm noted.

'Striking Midnight'

The proposed AG "may be viewed as striking midnight for some interim value formulas," Carlton Fields said. The proposal would allow an indexed-linked annuity to be considered a VA only if the annuity’s interim value is based on the market value of (A) actual separate account assets, or (B) a hypothetical portfolio of assets, each of which supports the guarantees of the contract.

Regulators explained their reasoning during a December meeting: If an ILVA owner is being subject to the risk of loss, then the contract holder should also benefit from gains, in the actual separate account assets or hypothetical portfolio assets.

Still, the American Council of Life Insurers said its members consider the AG as it is written too restrictive.

"Any AG under Model 250 needs to recognize that [ILVAs] are fundamentally spread-based products and that insurers employ a variety of practices with respect to where assets supporting the products are maintained," reads a letter from ACLI. "For this reason, it is both too simplistic and too restrictive to further define equity to mean that Interim Values must approximate the actual market values of the separate account assets."

Subgroup members were receptive to the changes suggested by industry. Their next meeting to discuss the AG proposal is March 2.

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.

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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.