NAIC Advances Model To Deal With Annuity Interest Rate Squeeze
Citing a critical need that guaranteed minimum interest rates realistically reflect current market rates, insurers say that unless they are allowed to credit a lower interest rate for individual deferred annuities, they cannot continue to offer many of the products currently on the market.
Addressing that issue, among others, regulators advanced a draft model of a Standard Nonforfeiture Law for Individual Deferred Annuities during the winter meeting of the National Association of Insurance Commissioners here.
The draft being exposed for additional comment includes language on minimum values but cuts out language that would have protected senior citizens.
On minimum interest rates, the draft says that it shall be the lesser of 3% per year and the following: the average of a five-year Constant Maturity Treasury Rate less 1.25%, with a minimum allowable rate of 1%. The rate is set for a specific period in the contract and may be redetermined for additional periods stated in the contract.
Additionally, minimum nonforfeiture values would be based on net considerations equal to 87.5% of gross considerations. Companies would be allowed a $50 annual contract charge.
The cut language spelled out guidelines for surrenders for contracts sold to purchasers aged 70 and older.
If a contract was not co-signed by a family member or investment advisor, the deleted language would have required that the cash surrender value during the period of up to one year after the contract issue and 30 days after the receipt of the annual report for the first contract year, equal gross considerations less withdrawals and debt to the company.
During discussion on the issue, Frank Dino, a life actuary with the Florida insurance department who is heading up a team developing the draft, said although insurers contention that it is really a suitability issue might to some degree be true, it is a real issue, nonetheless.
Sheldon Summers, a life actuary with the California insurance department, noted “seniors are a target for a lot of sales of these products.”
William Schreiner, a life actuary with the American Council of Life Insurers, said, “It is a bad idea. It would severely decrease value available to older consumers … It ought to be deleted.”
Several regulators agreed that the issue, while important, did not belong in a draft nonforfeiture law.
Comments from Tom Campbell, a life actuary with Hartford Life Insurance Company, Hartford, Conn., focused on reserves that would be needed to offer such a surrender period to seniors as well as its impact on a products return to a company.
At one point prior to its deletion, a 90-day surrender period from the day of purchase was offered as a compromise.
ACLIs Schreiner said a lot of companies are withdrawing products with early cash demands from the marketplace and other products are on a company watchlist that is reviewed on a monthly basis.
For instance, in a memorandum to regulators, Andrew Erman, a life actuary with USAA Life Insurance Company, said the company has suspended sales of seven annuity products, with two more on watch, a total of 42% of the companys product line.
Schreiner placed emphasis on the need to address the rate used for minimum guarantees. If consensus among regulators and industry can be reached, the concept can be brought before state legislators even before the model is fully adopted by the NAIC, he said, addressing the need for immediacy.
Commenting on specific points in the draft, Schreiner maintained that the reduction allowed in determining the minimum rate should be 2.5%, not 1.25%, and that premium taxes collected from companies ought not be included in the calculation given the fact that “the state and not the company has the money.”
William Cummings, a life actuary with Allianz Life Insurance Company, Minneapolis, recommended that as an alternative to a flat rate, an index be used. It would be structured as follows: five-year Treasury rates of 0-2%, 4-6%, 6-9%, and 9+%, would have respective guaranteed nonforfeiture rates of 0%, 1%, 2%, 3% and 4%.
The American Academy of Actuaries, Washington, also weighed in on the issue in a paper discussed by Dave Sandberg, a life actuary speaking for the Academy. The report cites three risks associated with low interest rate environments: an insufficient spread between a companys earned rates on assets and the credited rate on a contract; reinvestment risks for assets backing a contract; and, the risk that policyholders will abandon a contract if rates rise again.
And, Richard Kopcke, vice president and economist at the Federal Bank of Boston, said the discussion should be viewed in the context of an average 2% inflation rate in the 20th century, ignoring periods of war and oil rate spikes.
In addition to the debated sections of the draft, the model also addressed nonforfeiture calculations of paid-up annuity benefits and contracts that offer both annuity and life insurance benefits.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 16, 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.