Regulators Wary Of Disruptions To Hot RILA Market With New Rules

Concerns over how much disruption to introduce to the thriving market for indexed-linked variable annuity products dominated a regulator subgroup call today.

The Indexed Linked Variable Annuity subgroup is attempting to tweak nonforfeiture rules to better fit the unique ILVA products, also known as registered indexed-linked annuities or structured annuities.

The subgroup developed an actuarial guideline for technical changes to ILVA values that would bring the products in line with traditional VAs. Industry groups suggested several changes and are most concerned with disruption to markets.

"CUNA Mutual has been serving consumers in the ILVA space for over eight years and our experience shows ILVAs are an incredibly impactful tool in helping middle market customers create guaranteed retirement income," wrote David Hanzlik, vice president, annuity and retirement solutions for CUNA. "We take pride in helping those who make a modest income."

But Birny Birnbaum, executive director of the Center for Economic Justice, questioned why regulators would accommodate continued sales of products they deem problematic for consumers.

"This idea that [the approach is] let's fix this problem without even the possibility of stopping some products that are currently in the market suggests that this is not a serious enterprise," Birnbaum said. "Why wouldn't you want to stop the sale of those products and stop them as soon as you could?"

Pete Weber, life actuary for the Ohio Department of Insurance and subgroup chairman, said Birnbaum was overstating the issue.

"This type of a product fills a space in the market that could help promote better American retirement security down down the road," Weber explained, adding that the products have evolved. "If we felt like there were extreme abuses in this case, then it would be a different answer."

Hot Sellers

ILVA products charged onto the scene in 2018. Sales climbed 55% in 2019 and another 38.5% in 2020, according to the Secure Retirement Institute. The products offer returns based on the performance of an underlying index.

But those returns are not directly invested in the market, thereby reducing the risk of direct exposure to equities, while maintaining the crucial upside potential.

But the ILVAs do not exactly fit two key model laws: Model 250, Variable Annuity Model Regulation, and Model 805, Standard Nonforfeiture Law for Individual Deferred Annuities.

The former sets the nonforfeiture rules, or the rules that determine how much money a contract holder can get back if they give up the annuity, for traditional VAs. The latter set the nonforfeiture rules for fixed annuities.

The new indexed-linked annuities did not fit neatly into Model 250 because their daily values are not based on the value of units of a separate account. Rather, the daily values are based on formulas set forth in the contract.

In a client alert, the law firm Carlton Fields explained how the ILVA formula works:

• At the end of the index option term, looks to the performance of one or more indexes.
• During the index option term, may take into account the time remaining until the end of the index option term, the change in market value of the assets used by the insurer to hedge its obligations to pay the index-based interest, the change in a hypothetical asset pool that replicates the insurer’s hedges, and/or the actual change in the index to date, including the full loss to date.

Although similar types of formulas are used in many indexed-linked annuity products, there is variation on how interim values are determined among the ILVAs, the law firm noted.

Risk Vs Reward

The proposed AG would allow an indexed-linked annuity to be considered a VA only if the annuity’s interim value is based on the market value of (A) actual separate account assets, or (B) a hypothetical portfolio of assets, each of which supports the guarantees of the contract.

Regulators explained their reasoning during a December meeting: If an ILVA owner is being subject to the risk of loss, then the contract holder should also benefit from gains, in the actual separate account assets or hypothetical portfolio assets.

The ILVA subgroup opted not to put the AG out for exposure, but rather to meet at least one more time prior to the National Association of Insurance Commissioners' spring meeting next month.

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.

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