Regulators and some insurers contend that establishing an interest rate index is the first and most immediate step that needs to be taken to make sure deferred annuity contract holders realize proper minimum values in their contracts.
The issue of proper regulation of deferred annuity nonforfeiture values, is taking on immediacy because 14 states have sunset provisions on a 1.5% interest rate that determines minimum amounts consumers who hold deferred annuities would get if their contracts lapse.
A number of those states have mid-2004 sunset provisions, says the American Council of Life Insurers, Washington. Two states have have no annuity nonforfeiture law, so companies can credit any rate they see fit, according to information gathered by the ACLI.
The 1.5% rate was adopted by the National Association of Insurance Commissioners as a temporary measure to alleviate a financial squeeze insurers feared given 11 recent interest rate cuts by the Federal Reserve Bank. Previously, the minimum interest rate had been 3%. It was then adopted by some state legislatures.
The support of the Kansas City, Mo.-based NAIC was given with the understanding that a more permanent index solution would be developed. Under this scenario, the minimum rate that could be credited for nonforfeiture values would rise and fall with an index. At least one regulator suggested developing a model regulation that states could enact.
Toward that end, ACLI developed a draft of a proposed “Standard Nonforfeiture Law for Individual Deferred Annuities.”
But regulators took issue with the draft on several fronts during a discussion at the fall NAIC meeting in New Orleans.
While agreeing that a more long-term solution is needed, Leslie Jones, a South Carolina regulator, says that in South Carolina, the 1.5% interest rate will sunset in less than a year-and-a-half, necessitating development of a benchmark in the near future.
Although the ACLI draft addresses the interest rate issue, Jones says it would take a longer period of time to work on a model.
Two interest rate benchmarks are being advanced: a Treasury rate benchmark proposed by the ACLI and a SWAP rate the American Academy of Actuaries is recommending that regulators consider.
Once the benchmark is developed, Jones continues, then a model law can be created. However, she says the ACLI draft regulation is problematic because it gives insurers discretion to change rates and does not include disclosure requirements to consumers.
“Although, I think of myself as a free market person, the consumer needs protection,” says John Hartnedy, an Arkansas regulator. He says he wants to make sure that consumers get at least the minimum nonforfeiture value they are entitled to in their contracts and that fair interest rates are used to determine those values.
Some insurers, such as Transamerica Occidental Life Insurance Company, Los Angeles, say they need a solution now. State legislatures want to enact a permanent solution rather than take a two-step approach of enacting a temporary and then a permanent solution, according to Diana Marchese, a vice president and assistant general counsel with Transamerica Occidental.
Insurers need a permanent index solution they can bring to state legislatures when sessions start again in January, she says.
The index would create a minimum crediting rate for nonforfeitures, she adds. For competitive reasons, insurers could select a higher minimum crediting rate after assessing factors such as the product and its features and returns on investments.
A model law was offered, says William Schreiner, an ACLI actuary, because there was a question as to whether regulators wanted just an index or a broader option. ACLI will continue to work on an index as well as an index with an alternative, he adds.
The current ACLI draft would operate in a 1%-4% range. Any time the interest rate fell below 2.5%, the rate would have to be reset at the earlier of 10 years or the redetermination date specified in the contract, Schreiner explains.
ACLI favors disclosure to consumers, according to Schreiner. “You cant sell the product without it.”
An existing annuity disclosure regulation adopted by the NAIC would help provide consumers with needed information if states decide to adopt it, he adds.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 23, 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.