NAIC Working Group Chair Critical Of Annuity Illustration Changes

By John Hilton

The mood turned against allowing insurers to illustrate indexed annuities using indices that have been around less than 10 years during a state insurance commissioners' working group meeting today.

Birny Birnbaum, executive director of the Center for Economic Justice, swayed commissioners with passionate comments against the concept during a midday conference call.

Allowing insurers wide leeway in annuity illustrations is in direct opposition to what the National Association of Insurance Commissioners is trying to do with life insurance, he noted.

"The opportunities for mayhem are far too great no matter how good the intentions of the people who are composing it," Birnbaum said. "There are going to be people out there who want to game the system and this opens the door to huge gaming of the system."

A motion to vote down the effort died without a second. The group decided to have another call in two weeks.

The working group is tackling two issues:

• Under regulation #245, there is no way to illustrate indexes on fixed indexed annuities that have not been in existence for the previous 10 years.
• The definition of “non-guaranteed elements” could be construed to include participating income annuities because of the formula used to calculate the dividend scale.

Insurers say the 10-year requirement isn't necessary if index components have been around that long. The model law change would permit insurers to create a hypothetical "history" from the components.

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.

'Not A Great Spot That We're In'

Birnbaum picked up a key supporter when a colleague asked Chairman Mike Yanacheak, actuarial administrator at the Iowa Insurance Division, to give his opinion.

“I see this as a significant difficulty," Yanacheak said, choosing his words carefully. "The last I looked into the illustration of indices that were newly made up with hypothetical histories, the last time I saw anything that was allowed, was only allowed by FINRA in institutional sales with significant disclosure.

"Those are completely different types of buyers than consumers that typically buy these kinds of insurance products we are talking about today."

When illustrations get too difficult, with too much math, consumers are more likely to default to the conclusion and just accept it, Yanacheak explained. Still, the chair added that he would accept the working group's will, noting any vote requires a two-thirds majority since it is a model law change.

"Not a great spot that we’re in right now," he said. "But my concern on the proposal is that it puts us in a more precarious spot. Because there’s more information being given to consumers in a more confusing way."

Birnbaum kept returning to the core of the rule: permitting insurers to pick and choose the components that would be used to "backdate" an index. A simple data mining exercise will allow insurers to compile the best components for the rosiest index, he said.

The proposed disclosures to accompany the change will not be read, he added.

"While I certainly don’t attribute any bad intentions to industry, I think they believe they’re coming up with good products and they’re trying to figure out a way to educate and inform consumers," Birnbaum said. "It’s just not possible with these types of products."

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.