Regulators Face Harsh Critics On Indexed Annuity Illustration Rules

By John Hilton

State regulators plan one more conference call in a last-ditch effort to tighten up regulation of indexes used in indexed annuity illustrations.

But the National Association of Insurance Commissioners' working group appears further apart than when it started.

The Annuity Disclosure Working Group is studying a proposal to increase the time indexes must be in existence to be used in annuity illustrations from 10 to 15 years. Regulators are concerned that consumers are being misled by unrealistic indexed annuity illustrations.

The group has been working at the issue for many months, with little agreement. Chairman Mike Yanacheak, actuarial administrator at the Iowa Insurance Division, let his frustration show at the end of last week's conference call.

“We’ve got a broken model. I’m trying to get us to one that states will actually implement," Yanacheak told the group after his request for a motion to adopt went unheeded.

Instead, the group will try again with a July 29 conference call. If the group still fails to adopt a proposal, they might not get an extension during the NAIC Summer Meeting, Yanacheak said. The meeting begins Aug. 2.

The index illustration 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. These indices rely on other indexes to create a hypothetical historical record of return.

Since the illustrations are ultimately relying on a mismash of indices, regulators say a longer historical record is needed to account for the full economic cycle. The past ten years featured nothing but strong bull market returns, regulators noted.

These two issues drew the most debate during the most recent call:

Allowing indices to be constructed from 'financial instruments.'
Limiting the index look-back period to 20 years.

'Anything Goes'

According to Investopedia, financial instruments "can be real or virtual documents representing a legal agreement involving any kind of monetary value." Examples include stocks, bonds, treasury bills and certificates of deposit.

"In other words 'anything goes,'" said Birny Birnbaum, executive director of the Center for Economic Justice. "So we’re going to be allowing insurance producers to be selling products based on financial instruments and indexes they don’t understand and they’re not qualified or permitted to sell?

"'I can’t sell this financial instrument, but I can sell you an annuity that’s tied to this financial instrument.' So I guess my question is in what parallel universe is that an actual consumer protection?"

Birnbaum wasn't the only person on the call troubled by the addition of financial instruments to the proposal.

"I think that is taking us too far," said John Robinson, a Minnesota regulator. "I’m concerned that what would happen then is you’d have a real arms race among the companies and they might come back to us in two years and say ‘regulators, you went too far and need to fix this.’”

But there are other safeguards to prevent an "anything goes" mentality from becoming a reality, Yanacheak said. State regulators on the product side have the opportunity to reject indexes that do not adhere to best practices, he noted.

How Much History?

The proposal calls for establishing the best 10-year and worst 10-year performance periods from the most immediate 20-year period. That would be illustrated for the consumer. But the 20-year limit "defeats the purpose" of the disclosure, Birnbaum said.

"It makes absolutely no sense to us to arbitrarily limit the period for looking at the best and worst 10-year periods," he said. "For example, if the worst 10-year period in the last 20 is 1999-2008, why would we want to eliminate that data point when we move into 2019 and beyond?

"If we have the data, the whole point here is to demonstrate to the consumer the volatility of the product."

The 20-year limit is not a new change, Yanacheak noted.

"That’s something that has been in this model for several years now and that’s the starting point that we came from, what changes are needed in the model," he said.

But Birnbaum was not finished. He ripped the proposal as one that "accedes to everything demanded by industry without requiring any changes to industry practices." If approved, the language and options given to the industry will lead to "pseudo indexes" and "juiced illustrations."

"The proposal is astonishingly anti-consumer and must be rejected," Birnbaum said. "The proposed changes would be far worse for consumers than the current provisions and it would be far worse than nothing at all. What you’re doing is providing a liability shield for insurers’ misleading practices. Why in the world would you want to do something like that?"

'Get It Done'

Yanacheak acknowledged that the model could be better, but said the regulators are working within an imperfect system. To date, less than half of the states have adopted the current model for annuity disclosure, which includes the rules on index composition.

"I‘m trying to get us to a point where we have something better than we have today and what we have today is not a good solution," Yanacheak said. "So I understand the perspective that we may not be going far enough.

"I don’t know how far we try to go to aim and push for perfect when we can definitely get to a spot that is better and get it done. In some cases, done is better than perfect."

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.

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.