Two regulatory projects currently under way could have a major impact on annuities. The first would impact minimum crediting rates and product development for fixed annuities, while the second effort would affect reserving for variable annuities and variable products.
Work on changing the minimum interest guarantees in individual deferred annuities to reflect record low interest rates is considered a high priority item for life insurers selling these products.
Indeed, in a recent letter to regulators, William Schreiner, a life actuary with the American Council of Life Insurers, Washington, writes that without a change to minimum guarantees, a low interest rate environment will “negatively impact an insurers ability to offer deferred annuity products and meet contractual guarantees to customers.”
Regulators also want to get decisions made so they can offer guidance to legislators on how to approach the matter.
For instance, during a discussion on the issue, Mike Batte, a life actuary with the New Mexico insurance department, said that currently his states legislature is working on a bill, and it was his hope that consensus by regulators on changes could be quickly reached.
Indeed, a number of legislatures have bills pending that would provide guidelines that sunset while the National Association of Insurance Commissioners, Kansas City, Mo., develops a more enduring approach that uses an index as a benchmark to determine what interest rate crediting minimums should be used.
It is hoped that a draft of the amended Standard Nonforfeiture Law for Individual Deferred Annuities will be ready for the Life & Annuities “A” Committee during the spring NAIC meeting next month. From there it would need to jump over two more hurdles–executive committee and full plenary–before insurers could bring the approved revisions to existing law to legislators.
But a recent discussion on whether equity indexed annuities, a type of fixed annuity, should have an offset provision in the amended model to put them on a level playing field with other annuities, underscored the difference in opinions on the details of proposed changes. An offset provision would allow an equity guarantee in an EIA to offset the straight interest guarantee in the product.
Opinions among regulators themselves and between regulators and some industry representatives, differ on issues that include: what happens when interest rates make a U-turn and head back up again; whether EIAs should be discussed at all since they are “tangentially tied” to interest rates; and whether the minimum value calculation for nonforfeiture amounts should subtract a $50 annual contract charge and any premium tax paid by the company for the contract from the accumulation value in the contract.
Schreiner also says the interest rate employed to determine nonforfeiture values should use a three-year average constant maturity treasury rate minus 1.25% rather than a five-year CMT minus 1.25%. He says the three-year CMT better enables insurers to offer products and meet customer guarantees.
A constant maturity rate takes the average yield of U.S. Treasury securities and adjusts it for the period under examination. CMT indices move with the market.