NAIC Advances Model To Deal With Annuity Interest Rate Freeze

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.