SEC Eyes Variable Annuity Buyout Disclosures

Variable annuity carriers need to focus carefully on disclosures they make in their buyout offers to policyholders, said a Securities and Exchange Commission (SEC) official in a speech this week in Washington.

The disclosure staff also is monitoring disclosure of variable annuity fee tables, said Dave Grim, director of the SEC’s Division of Investment Management.

The disclosure heads-up appears in published text from Grim’s remarks before the 2015 Conference on Life Insurance Company Products of the American Law Institute Continuing Legal Education Group (ALI CLE).

The buyout issue                                                       

The buyout offers the SEC is seeing are being made to owners of variable insurance contracts having “generous guaranteed income benefits and death benefits,” Grim said.

The benefits have, over time, “proven costly for insurance companies and their hedging programs in light of the ongoing low interest rate environment,” he said, so some variable carriers are making offers to buy out owners of those contracts.

Similar offers made headlines a few years ago when several variable annuity carriers made buyout offers to existing policyowners. News about those offers has since faded away. However, according to Grim, the trend is continuing today among “several variable product issuers.” He said the SEC staff has noticed this during disclosure reviews.

Typically, the existing contract owners receive an incentive from the carrier to take the offer, Grim said.

An incentive might be an increase in contract value or a lump sum payment in exchange for the termination of the guaranteed benefits or even the surrender of the entire contract, he said.

Other offers might be incentives for early annuitization. Such offers often are made along with an offer to exchange all or part of the contract for another insurance contract issued by the insurer, the SEC official said.

The offers often limit an insurer’s exposure under existing guaranteed benefits, he allowed. But he also said they “may not be beneficial for all, or even most, contract owners.”

The staff will continue to review disclosures relating to such offers, Grim said. It will also “be diligent in considering the impact on contract owners and seeking to elicit clear disclosure to investors.”

Variable annuity fee table

In other remarks, Grim noted that, as part of his division’s disclosure review project, the disclosure staff is putting “increased focus” on the fee table used in variable annuities.

The table has become “quite complicated” for many products, particularly policies having guaranteed benefit riders, he said, noting that “the impact of fees on an investor’s return is considerable.”

For that reason, “our disclosure staff is looking for a clear and comprehensive fee table when reviewing variable annuity filings,” Grim said.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].