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.