Regulators tackle controversial annuity illustrations

Once annuity illustrations began showing returns as high as 27%, regulators knew they had to do something.

 The National Association of Insurance Commissioners’ Annuity Illustration Working Group is well on its way to either changing to the annuity illustration model regulation or working with an actuarial guideline.

Maybe both.

At minimum, annuity sellers should expect a significant overhaul of how illustrations are used in the sales process.

Under Chairman Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce, the working group is weighing revisions addressing illustration length, disclosure requirements, accountability measures and how insurers present non-guaranteed crediting rates.

But first, the working group needs approval from its parent committee, the Life Insurance and Annuity Committee, as well as the NAIC Executive Committee before it can reopen the annuity illustration Model 245.

“Hopefully, in the next couple of months we can get sign-off there to reopen the model, at which point under NAIC policy I believe we have a year … to modify the model,” Slutsker explained during a recent conference call.

The group is simultaneously considering a temporary “stopgap” approach through an actuarial guideline that could be used before any model revisions are adopted by individual states. Industry trade groups are not keen on that idea.

“We think that there are some other alternatives that you could use as a stopgap that is not an actuarial guideline,” said Carrie Haughawout, senior vice president of life insurance and regulatory policy at the American Council of Life Insurers, during a June call. “There are some questions about whether an actuarial guideline is going to go beyond and act more like a policymaking tool than a guideline.”

Slutsker shared this flow chart plan for a stopgap solution.

Regulators have informally collected illustrations from roughly 25 to 30 of the top annuity market leaders. A preliminary review found that about one-third of companies showed highest illustrated annual returns of 10% or lower. The remaining two-thirds showed at least one product or index with illustrated returns above 10%.

Of those above 10%, roughly half fell in the 11% to 15% range, while the rest ranged from 16% to as high as 27%.

Comment letters discussed

As this issue went to press, regulators were considering a list of potential modifications compiled from public comment letters. Several proposals focused on shortening annuity illustrations, which some regulators said have become overly lengthy and difficult for consumers to understand.

Joshua Blakey of the Oregon Division of Financial Regulation expressed support for combining multiple illustration scenarios into a single ledger, arguing that side-by-side comparisons could reduce consumer fatigue caused by lengthy documents.

Shorter illustrations would not only reduce document volume but also help consumers avoid being distracted by large projected account values generated through decades of compound growth, said Mike Yanacheak, chief actuary at the Iowa Insurance Division.

“A lot of people don’t really get and understand compound interest and what it can do and might miss the whole point of what the illustration is trying to show about how a product works when it just dazzles with really, really big numbers that might be 50 or 70 or more years out,” Yanacheak said.

Consumer advocates urged regulators to focus on simplifying disclosures rather than adding complexity.

Bonnie Burns of California Health Advocates said consumers often struggle to understand annuity products and may be unaware of fees and charges associated with riders and benefits.

She suggested a simple question-
and-answer format addressing common consumer concerns, including benefit eligibility requirements, costs and long-term care features increasingly attached to annuity products.

And it is worth repeating some information contained in the Annuity Buyer’s Guide, Burns stressed.

“The buyer’s guide is a great tool,” she said, “but not everyone will read that, and they certainly won’t read it at the time of sale. Some duplication of the most common things that consumers are concerned about would be an appropriate disclosure.”

Non-guaranteed rate debate

Regulators are particularly concerned with how insurers should illustrate non-guaranteed crediting rates, one of the most contentious issues facing the working group.

Some participants questioned whether illustrations should be used primarily as educational tools or as sales tools that allow consumers to compare competing products.

Some speakers on the June call urged regulators not to eliminate consumers’ ability to compare products from different insurers. Others argued that illustrations should focus on explaining product mechanics rather than projecting future performance.

Blakey said illustrations that function as sales tools create incentives for insurers to show increasingly optimistic crediting rates.

“I feel like the more that these are used as sales tools, the more incentive there is to show higher and higher crediting, regardless of the product type, if you’re trying to differentiate yourself from competitors,” he said. “So I like the idea of trying to make them more informational and educational than a sales tool.”

There are rate sheets and brochures and other items that can be used as advertising, Blakey added.

The working group is collecting feedback on a pair of exposure drafts: one seeking feedback on potential modifications to Model 245 and another requesting comments on the proposed actuarial-guideline framework and alternative stopgap measures.

Regulators said they expect to review comments later this summer as they continue work on the model revision effort.

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.