Regulators Expedite Proposal To Trim Guarantee Rate

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Regulators are moving quickly to expedite a request from life insurers for regulatory support for the reduction of the 3% guaranteed minimum rate in fixed insurance products to 1.5%.

The full backing of the National Association of Insurance Commissioners to reduce the guarantee for fixed annuities and fixed rate subaccounts in variable annuity products could occur on Feb. 9 during the commissioners’ annual retreat.

That vote would follow the unanimous support the proposal received in a vote by the NAIC’s Life Insurance & Annuities “A” Committee.

The support assumes work on a longer-term solution such as an index that would be used to adjust rates as the interest rate environment changed. It also assumes a sunset provision in any bills introduced in legislatures.

The American Council of Life Insurers, Washington, says its members are feeling the effects of rate compression that have resulted from the drop of interest rates over the past year (see NU, Feb. 4.)

Insurers are arguing that they can only afford to guarantee 1.5% and that immediate relief is needed. They say they need regulatory support so they can approach legislatures for changes in the law, a process they say will take two years.

The Iowa insurance department is scheduled to introduce a department bill to its legislature this week that includes language to reduce the guarantee to 1.5% with a sunset provision of July 1, 2003.

The availability of products on the marketplace with short-term guarantees is already being reduced, says William Schreiner, an ACLI life actuary.

If laws cannot be changed uniformly, there could be a “checkerboard availability of products,” he adds. These products will still be available in states that have lowered the rate but may be less available in those states in which the rate remains 3%, he warned.

Utah Commissioner Merwin Stewart asked insurers about the proportion of their business that fixed products comprise.

In response, Linda Lanam, ACLI vice president and deputy general counsel, said it depends on the company. But, she added, that at a company where she previously worked, the proportion ranged from 25%-40%, depending on the market environment.

Another comment suggested that some companies’ entire block of business could be made up of fixed products.

An uncertain stock market has made fixed products more popular but unless action is taken “we will continue to see the market dry up,” Lanam says.

It will be a two-year process before laws can be changed to reflect the 1.5% rate and if action is not taken right away it could be 2005 or 2006 before change becomes effective, Lanam said.

Mike Batte, chair of the Life & Health Actuarial Task Force, the NAIC group through which the issue normally would have been channeled if an expedited response had not been sought, said regulators at LHATF may not want to restrict their review of annuity nonforfeiture strictly to interest rates. Rather, he continued, they may well want to take a more comprehensive approach to examining the issue of nonforfeiture values in annuities when work on the long-term aspect of the project starts.


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 11, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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