Regulators Settle On 0.15% Nonforfeiture Floor On Deferred Annuities

A state regulator task force took another stab at resetting the standard minimum nonforfeiture interest rate for individual deferred annuities to help insurers cope with historically low interest rates.

Regulators had previously toyed with dropping the rate from 1% to 0%, but the Life Actuarial Task Force revisited the issue today and settled on 0.15%. The task force is composed of members of the National Association of Insurance Commissioners.

Citing COVID-19 impact, insurers have pleaded with regulators to reduce the 1% nonforfeiture rate. The 10-year Treasury rate fell well below 1% amid the virus outbreak in March and has not recovered, making it very hard for insurers to make good on product guarantees.

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.

What Number Is Right?

The task force voted 14-3 to adopt the 0.15% floor, with New York, Missouri and New Mexico voting No. The change moves on to the Life and Annuity Committee for consideration.

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Mona Bhalla, deputy superintendent for life insurance in New York, was not convinced consumers are best served by the change.

"I don't believe it strikes the right balance between those concerns and consumers' interest, particularly given that consumers would be depositing a significant amount of premium and not be able to take that premium out without being subjected to very large surrender charges and earn basically nothing on that money," she said.

Fred Anderson, deputy commissioner of insurance for Minnesota, pointed out that a floor is just a floor, and the free-market competition is still on the side of the consumer.

"I think we've seen that the annuity market is fairly competitive at the current time," he said. "And if the environment is ripe for guarantees in excess of whatever ends up being the minimum being offered, I think companies will be willing to offer those products."

Bhalla acknowledged the point, but said the "value and power of a floor" was a stronger influence on New York's position.

'Solvency Concerns'

Rhonda Ahrens is chief actuary of the Nebraska Department of Insurance. The 1% nonforfeiture floor was established in 2003 when interest rates were far higher, she noted.

"Nobody could imagine this interest rate environment," she said. "If this continues this way, and companies stay in longer and don't pull products, because they think they can make it a little while longer with a 1% minimum, will we have solvency concerns?"

Mike Boerner is chair of the task force and director of the actuarial office of the Texas Department of Insurance. He has met with several insurers who have genuine financial concerns, he said.

"Companies I talked to that just have the regular fixed annuities have concerns that (interest rates) could go down even more and then persist for a long time," Boerner said. "And they have very strong concerns about that."

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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