NAIC Subgroup Says Contingent Deferred Annuities Are a Life Insurance Product

By Fran Lysiak

A.M. Best Company, Inc.

A majority subgroup of the National Association of Insurance Commissioners has recommended to the NAIC's "A" Committee that controversial longevity risk-protection products dubbed contingent deferred annuities are a life insurance product that should be written by life insurers and not property/casualty insurers, the subgroup's chairman told Best's News Service.

Because there are "life contingent pricing components" inside this product, the subgroup majority concluded they are best written through life insurers, Felix Schirripa, chairman of the contingent deferred annuity subgroup, told Best's News Service Feb. 22, when his group's report was released. These products resemble the guaranteed lifetime withdrawal benefit rider on traditional stock market-linked variable annuities, said Schirripa, chief actuary of the New Jersey Department of Banking and Insurance.

However, the subgroup also thinks these products "present risks that are akin to those in financial guaranty insurance" but nevertheless, a majority believed that property/casualty companies "should not be allowed to write them," he said, noting financial guaranty normally is written by property/casualty insurers.

The debate centered on whether these products are annuities or financial guaranty insurance—with the two biggest U.S. life insurers on opposite sides. MetLife argued CDAs are not life insurance but financial guaranty insurance while Prudential Financial contended they're similar to a living benefit rider on a variable annuity.

The industry, "except one company," has argued these are not financial guaranty but are life insurance products, Schirripa said.

MetLife is "committed to the development of innovative products that provide retirement income, while ensuring that the products continue to deliver on their guarantees," said Chris Breslin, a spokesman for MetLife, in an email. "We want to work with those in the industry to make that happen."

Lisa Bennett, a spokeswoman for Prudential Financial, said Feb. 23 the company "is still reviewing the report."

The subgroup wants reserves and capital requirements "to be re-evaluated," Schirripa said, referring to Actuarial Guideline 43, which governs statutory reserve requirement for variable annuities and GLWBs.

The reserving guidance in AG 43 "is fairly broad and could easily be extended to products like [contingent deferred annuities]," he said, noting the subgroup is now seeing "potentially some risks akin to financial guaranty insurance," Schirripa said. The subgroup is suggesting that reserving requirements need to be looked by the regulators more carefully, he said. The subgroup no longer calls them "hybrid income annuities" but rather what the industry has been calling them—contingent deferred annuities, which are the stand-alone GLWBs on covered assets administered outside an insurance company; and, GLWBs that have been sold with traditional variable annuities for years, Schirripa said.

If the NAIC opens up AG 43, "billions in reserves" could possibly be at stake for all variable annuities with riders that are governed by this guideline, said Steven Schwartz, an equity analyst with Raymond James.

Companies that sell CDAs "want to reach buyers that would never consider buying a variable annuity," Schirripa said.

Schwartz said the debate surrounds contingent deferred annuities sold on non-VA or noninsurance products, such as mutual funds. Mutual funds can't sell lifetime guarantees, only life insurers can so a mutual fund company contracts with a life insurer to guarantee the funds. "What is that?" Schwartz said, noting the question is whether that's the same as a VA rider.

Schwartz said he thinks it's a financial guaranty product and the problem is that life insurers aren't regulated to sell that type of product. Financial guaranty insurance guarantees the payment performance of another party.

"Our position from an actuarial viewpoint is that contingent annuities are annuities, not financial guaranty products," said Nancy Bennett, senior life fellow with American Academy of Actuaries, who was part of the academy group that commented on contingent annuities at the NAIC. "They contain similar risks as VA contracts that are already issued by life insurance companies."

However, the New York insurance department in 2009 called these contracts "impermissible financial guaranty" contracts, and not insurance, Bennett said.

Kelly Ireland, senior counsel, insurance regulation, for the American Council of Life Insurers, said in an email that, "the working group has reached the correct conclusion that CDAs are annuities that can only be sold by life insurers. While the current regulatory structure for annuities is sound, the ACLI is prepared to assist regulators on the Life Insurance and Annuities (A) Committee in their review of this structure as it applies to CDAs."

Lee Covington, senior vice president and general counsel for the Insured Retirement Institute. said in an email the IRI agrees with the subgroup's determination that these products should be classified as annuities "which should be provided by life insurers. 

"Our consistent view has been that contingent annuities are annuities under state law, so we view the subgroup’s determination as very positive," Covington said. "We are also encouraged by their intent to apply existing rules to CDAs in an ongoing way."

The subgroup was charged to address issues previously raised by the NAIC's Life Actuarial Task Force, which also reports to the A Committee.

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])

Copyright:	(c) 2012 A.M. Best Company, Inc.
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