Regulators, Industry Reps Tangle Over Indexed Annuity Illustrations

An industry attempt to beat back a tougher indexed annuity illustration regulation appeared to fail Wednesday after a consumer advocate blasted the effort.

The National Association of Insurance Commissioners' working group is studying a proposal to double the time indexes must be in existence to be used in annuity illustrations from 10 to 20 years. The Annuity Disclosure Working Group is concerned that consumers are being misled by unrealistic indexed annuity illustrations.

A comment letter from the American Council of Life Insurers proposed a middle ground of 15 years. That drew the ire of Birny Birnbaum, executive director of the Center for Economic Justice, during a conference call Wednesday.

"The industry never sought to improve consumer protections," Birnbaum said. "They always sought greater flexibility in the illustrations. The industry comments that their current proposal for 15 years is a compromise is blatantly false. It’s a compromise from their original request, not a compromise with any proposal to improve consumer protections."

During a previous call, an Allianz representative said the 20-year requirement would eliminate about 70 percent of the indexes being used. Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute, reiterated that point on this week's call.

"It's not clear to us how we would manage that disruption," he said.

Proprietary Indexes

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, commissioners 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, commissioners noted.

In addition, ACLI proposed a new disclosure that would "inform the consumer of the number of illustrated years the index has been live and the number of years for which illustrated values are calculations of values the index would have had if it was in existence."

Birnbaum rejected that idea, too.

"We don’t think that’s going to empower the consumer," he said. "It’s just going to be another disclosure that serves as a liability shield for the insurer, but that isn’t really going to empower the consumer.

"Consumers are going to assume that if a company is making a disclosure about assertions within an illustration, then it has to be legal. That it has to be consistent with what regulators require."

Birnbaum asked for disclosures to alert consumers about "what to look for." For example, he accused annuity sellers of "misleading" consumers by clearly explaining how asset charges can lower their account values.

Another Call

The working group is up against a deadline with the NAIC Summer Meeting set to begin August 3 in New York City. Chairman Mike Yanacheak, actuarial administrator at the Iowa Insurance Division, urged the group forward, but said he could not support the 15-year idea.

"My gut says 20 is a good number," he said.

John Robinson of Minnesota proposed one more call to try and work through final issues, including the proposed ACLI disclosure.

Birnbaum pleaded with the working group to "stand up" for tougher regulation of the indices.

"We’re talking about products in which consumers turn over their lifetime income to the insurance company," he said. "If there was ever a prod where consumers need to know all of the risk, and to underst the expenses associated with that, this is it. And we know the current illustration regime doesn’t accomplish that for consumers.

"So we ask you to step up and really improve the operation of this model."

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.

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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 john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.