Regulators Consider 0% Nonforfeiture Floor On Deferred Annuities

By John Hilton

A National Association of Insurance Commissioners' committee voted Friday to kick off a model law development project to drop the standard minimum nonforfeiture interest rate for individual deferred annuities from 1% to 0%.

Regulators told the Life Insurance and Annuities Committee the nonforfeiture floor reduction is needed by insurers due to COVID-19 impacts. The 10-year Treasury rate fell well below 1% amid the virus outbreak in March and has not recovered.

Insurers face great difficulty generating revenues in an extreme-low-interest-rate environment, executives said during first-quarter conference calls.

Nonforfeiture means the amount an insurer must pay a consumer who surrenders a cash value policy or any policy with such a nonforfeiture benefit. The benefit is based, in part, on an interest rate to reflect earnings on policyholders' money.

The American Council of Life Insurers appealed to the NAIC to open up the Standard Nonforfeiture Law for Individual Deferred Annuities.

"When we proposed this change on the floor from 1% to zero, we were looking at a very strategic change given some of the issues that companies are running into offering a 1% guarantee in this environment," explained Brian Bayerle, senior actuary for ACLI.

The Life Actuarial Task Force will be in charge of the project. Committee members offered guiding comments during Friday's call, with some members uncomfortable with the 0% floor.

A state regulator on the call expressed doubt about the consumer appeal of 0% floors.

"From the point of view of consumers, a fixed annuity that pays out at some nice rate the first year and then has a guaranteed rate of zero, I'm envisioning some potential issues down the road on the marketing of those," said Matt Gendron, general counsel for the Rhode Island Department of Business Regulation.

"So if it had a minimum rate, I don't know, maybe a half-percent could be appropriate, but if LATF could consider that I would appreciate it."

The task force meets next Aug. 3 during the NAIC virtual summer meeting.

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.