Should fixed index annuities with market value adjustment (MVA) features be sold by prospectus? In other words, should they be treated as registered products?
For instance, in Pennsylvania, should an FIA policy with an MVA clause be filed by prospectus as a general account modified guaranteed deferred annuity contract within the purview of Pennsylvania Insurance Department No. 1994-11?
My reason for raising such a controversial question follows.
I recently received statements from 2 prominent insurance companies showing their customers that they would lose in excess of 30% of their fixed index annuity principal because of surrender charges and the MVA in their products.
This, to me, was shocking.
Why should the owner of a fixed index annuity or life insurance policy have to share the interest rate risk or option price risk–or both–with the insurance company through an MVA clause?
With the MVA clause, the policy would seem to act like a security. This certainly is not the customer’s expectation when purchasing a fixed annuity or life insurance policy.
Let’s review the relevant history.
In 1994, the Pennsylvania department put out a notice (1994-11) announcing that general account modified guaranteed deferred annuity contracts would be considered for approval. Such contracts were defined as individual deferred annuities, the underlying assets of which are held in the general account and the values of which are subject to an MVA unless held for guarantee periods that are specified in the contract.
Now, MVAs in that state, as elsewhere, were first associated with multi-year guarantee annuities (MYGAs). These are annuities that guarantee a fixed credited rate for a specified term, usually coinciding with the surrender charge period, or a surrender charge and MVA free access window at the end of a specified rate guarantee period.
Today, annuity companies may offer two very similar MYGA policies: one with an MVA and one without an MVA. The annuity with the MVA usually has a higher guaranteed credited rate.
The customer can then decide if the increased credited rate is fair compensation for accepting the risk associated with the MVA. The customer also understands that the MVA is a function of interest rates and, as with bonds, the customer can receive more or less than the stated annuity value, unless held to the end of the rate guarantee period. MYGA customers know what their account value will be (not including the MVA) at any point in time.