Minimum Nonforfeiture Rate Change For Annuities Adopted By NAIC
A fast-track effort to lower the minimum nonforfeiture interest rate for individual deferred annuities was adopted here by the National Association of Insurance Commissioners, but not without a fight.
Pointed exchanges among some commissioners, industry representatives and one regulator touched on a broad swath of issues, including who commissioners answer to, whether insurance department staff at NAIC meetings take positions without properly consulting commissioners, consumer protections, availability of product because of low interest rates, and undue emphasis being placed on meeting legislative deadlines to the detriment of a proper vetting of issues.
The changes to the Standard Nonforfeiture Law for Individual Deferred Annuities Act adopted by the NAIC create a basis for determining minimum nonforfeiture amounts using an interest rate that is the lesser of 3% per year plus a five-year constant maturity rate, an average of Treasuries, less 1.25%. The resulting interest rate used to determine nonforfeiture values cannot be less than 1%. Previously, there was a fixed 3% minimum nonforfeiture interest rate.
The newly adopted act also requires that the nonforfeiture amount be based on 87.5% of gross consideration or premium payments rather than a previous 65%.
A nonforfeiture rate is the interest rate applied to the amount a contract holder receives when a contract is surrendered or lapses.
The issue was raised by the American Council of Life Insurers, Washington, over a year ago in response to record low interest rates, the result of 11 interest rate cuts by the Federal Reserve.
In February 2002, the NAIC supported industry efforts to go to legislatures and ask for a reduction in the nonforfeiture rate to 1.5%, but charged the Life & Health Actuarial Task Force with developing a more permanent solution.
As a result, over 20 states have reduced the nonforfeiture rate to 1.5%, with two-thirds of those states including a sunset provision that would result in the rate reverting to 3%. A few of those states have changed the rate permanently while 30 states still have the 3% rate.
The ACLI sought expedited changes to the law so it could lobby to include these changes in state bills during the current legislative session in order for there to be a uniform nonforfeiture rate.
A special conference call was held so that a quorum could vote the proposal out of the LHATF group, and a special “A” Committee meeting was called on March 8 with some regulators receiving an hours notice that the meeting was going to be held.
Indeed, during the discussion, commissioners including Mike Pickens, NAIC president and Arkansas commissioner, and Jose Montemayor, Texas commissioner, said their legislatures needed action with the next few weeks.
But Mike Batte, a New Mexico regulator who heads up the task force, argued that because the model was fast tracked and procedure was not followed, there was not a proper exposure period. Consequently, according to Batte, there were still unanswered questions about the changes.