NAIC Working Group Plans Deeper Dive Into Annuity Illustrations

A state insurance commissioners' working group wants more time to consider tweaks to a plan allowing insurers to illustrate indexed annuities using indices that have been around less than 10 years.

During their latest conference call today, the Annuity Disclosure Working Group seemingly reached an impasse when John Robinson of Minnesota proposed changes. The substantive change would double the 10-year limitation to 20 years.

"As long as a unique history can be established going back 20 years, then I think we are in good shape," Robinson said.

The change is one advocated by Birny Birnbaum, executive director of the Center for Economic Justice.

"The purpose of the 10-year limitation in the model is to prevent the use of illustrations based upon a short time frame that misrepresents the likely longer-term risk-return of the product," he wrote in a comment letter released today. "But, it is now clear that 10 years is too short a period of time to capture an economic cycle."

While the change might be a good one, Chairman Mike Yanacheak said, the working group will need approval from its parent committee to continue working on the model. He plans to ask for that time at the NAIC Fall Meeting Nov. 15-18 in San Francisco.

"If we don't get the extension, we're effectively done with this issue," Yanacheak said.

Two Main Issues

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.

Allowing insurers wide leeway in annuity illustrations is in direct opposition to what the NAIC is trying to do with life insurance, Birnbaum again noted.

Lax rules on proprietary indices "permits insurers to cherry-pick sectors or categories to produce
a magical 10-year return that misrepresents the experience a consumer will have with the product," he wrote.

'It's Going To Get Sold'

Early in the call, Robinson asked Birnbaum whether he would prefer no illustrations at all with some of the annuity products.

“It’s going to get sold," Robinson said. "So you would prefer that it get sold without an illustration?"

“That’s based on the assumption that a company is going to be able to sell a product without an illustration," Birnbaum said. "By prohibiting an illustration in a case where the illustration can’t help but be misleading, I think that would lead to better consumer protection."

If the working group gets permission to continue, a conference call will be scheduled following the Fall Meeting, Yanacheak 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 [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.