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Regulation and Compliance > Federal Regulation

Regulators Talk About Annuity Suitability Rules

By Jim Connolly

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Some regulators are asking whether they should be talking about minimum annuity nonforfeiture interest rates at a time when some older consumers are buying contracts with 25% surrender charges.[@@]

During a discussion here of the Annuity Nonforfeiture model regulation at the summer meeting of the National Association of Insurance Commissioners, Utah regulator Tomasz Serbinowski said regulators should be looking at the sale of annuities with an initial 20% bonus and a 25% surrender charge rather than at the minimum nonforfeiture rate.

“I don’t believe consumers are really served by that charge,” Serbinowski said. “A major consumer protection should be controlling and limiting surrender charges.”

The remarks were made following a debate over whether to scrap an index rate in favor of a single interest rate.

A motion for a simpler approach sparked questions from regulators about what interest rate would be used.

The motion ultimately failed by a vote of 5 to 6, with 3 abstentions.

After the vote, Jim Van Elsen, an actuary with Van Elsen Consulting, Pella, Iowa, said regulation should be accompanied by disclosure. “Most of the annuities with long-term surrender charges are being sold to seniors who do not have long-term horizons, and that is wrong,” Van Elsen said.

Earlier, Serbinowski noted that the change in the Standard Nonforfeiture Law for Individual Deferred Annuities was enacted by NAIC 2 years ago in March. “We are still debating the model regulation,” he said. “We struggle in Utah with insurers trying to guess which way this may go.”

Whether the change is 1%, 2% or 3%, “the time would be much better spent doing something else,” Serbinowski said. “I don’t see the process close to an end, and it could get progressively worse.”

Kansas regulator Larry Bruning said the current temporary interest rate sunsets in Kansas July 1, 2006. Unless there is a new regulation in place, the minimum will revert to the prechange rate of 3%.

Regulators put a change of the SNL on a fast track because insurers were concerned about 11 consecutive cuts in the Federal Reserve discount rate. The SNL change is viewed as temporary.

Diana Marchese, a representative for Transamerica, Los Angeles, an affiliate of AEGON N.V., The Hague, Netherlands, urged caution, noting the flexibility of an index approach, the work invested by the NAIC, the National Conference of Insurance Legislatures, Troy, N.Y., legislators and companies. She said the uniformity that has been created by states could be replaced by a “checkerboard” of regulations if a motion for use of a single minimum interest rate were adopted.

She also said that, to get the benchmark, insurers gave up expense loads and fees. “The industry did give back,” she said. “We gave to get.”

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