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.
Commissioners voiced some of those questions.
Tom Gallagher, chief financial officer of the Floridas new Office of Financial Services which includes an insurance division, urged the rate be raised to 4% rather than 3%, arguing that in a low interest rate environment the formula would produce a rate that reflected current rates. The 4% rate would make the model more attractive to legislatures, he said.
A vote taken by commissioners on the proposed 4% change was defeated 28-10.
But the issue continued to be discussed as other commissioners suggested it might be wiser to send the model back to LHATF for more work.
Batte noted that commissioners on LHATF could create a needed quorum to adopt any new version of the model but that many of the actuaries who had actually worked on it had already left the meeting.
John Hartnedy, deputy insurance commissioner in Arkansas who was part of the development of the model, noted that the vote taken by LHATF was unanimous with the exception of one abstention and one call lost due to technical difficulties when the conference call vote was taken. Consequently, he said, sending the product back to LHATF would not change it.
The industry also conceded points such as agreeing to a five-year rather than a three-year constant maturity Treasury rate and an 87.5% net consideration total, he said. The five-year rate lowers the overall rate.
“We are breaking faith with the industry. If we are not doing the right job for you, then put other actuaries on the committee,” he added. “To put it bluntly, we are going behind their backs.”
In response, Georgia Commissioner John Oxendine responded, “Commissioners represent the citizens of our states. Commissioners have to make the judgment calls and they should make the decisions. There are too many staff running off on their own and making decisions.
“Im not breaking faith with the industry. Im not going behind their backs because I havent promised them a darn thing.”
If the rate was raised to 4%, when rates climb up again, the minimum would be a third greater than the previous 3% rate, explained Barbara Lautzenheiser of Lautzenheiser and Associates, a Hartford, Conn., actuarial firm.
Even though the rates would be higher than the minimum, that minimum could require companies to offer higher guaranteed rates, she continued.
“Guarantees cost money” and consequently, products with nonguaranteed elements could disappear from the market as companies seek ways to pay for the increase in guaranteed elements in the contract, she told regulators.
Prior to the vote at executive and plenary, Bruce Ferguson, a representative with the American Council of Life Insurers, said the change to 4% would have to be discussed by members and could be “problematic” given points such as the five-year CMT and 87.5% net consideration rate that insurers had agreed to.
Reproduced from National Underwriter Edition, March 17, 2003. Copyright 2003 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.