Life insurers and life settlement professionals are taking opposite sides over a model state regulation that would let deferred annuity carriers terminate a living or death benefit if a policy owner sells the annuity in the secondary market.

The Interstate Insurance Product Regulation Commission’s product standard committee voted Feb. 22, 2009 in favor of a standard that would allow annuity carriers to terminate the living benefit of a contract upon a change of the contract’s ownership.

The rule applies to guaranteed living and death benefits for individual deferred annuities, both fixed and variable. It would allow some exceptions, such as when a new owner is a personal trust, a joint husband-wife ownership, a new spouse, or the result of a 1035 exchange, in which one annuity is exchanged for another.

Of 36 jurisdictions, including Puerto Rico, that are members of the IIPRC, 29 regulators took part in the full commission vote, which was overseen by Ohio Insurance Director Mary Jo Hudson, chair of the IIPRC.

Only the representative from Indiana voted against the Guaranteed Annuity Standards proposal. The other 28 voted for it (see list below).

The new rule, approved in a telephone conference of the committee, states only that guaranteed riders can be terminated, notes Karen Schutter, executive director of the IIPRC, Washington, D.C. “The underlying base policy could not be terminated,” she added.

The rule will become effective 90 days after the committee vote. Individual states would have the right to opt out of the compact.

In January, the management committee of IIPRC directed the commission’s product standards committee to finalize the rule. The committee has been holding hearings on the rule since October and it has received written comments about contract termination provisions in the standards.

One late change the IIPRC’s product standard committee made to the rule would require annuity carriers to clarify any transfer-of-ownership restrictions to consumers.

The mandatory disclosure would state that the guaranteed living benefits would terminate upon assignment or upon a change in ownership of the contract unless the new assignee or owner meets the qualifications specified in the termination provision of the GLB provisions.

Life settlement firms and life insurance carriers clashed on the rule during the hearings about whether the rule would hurt or benefit consumers.

Insurers argued that allowing annuities to be sold to investors would raise prices of the products to ordinary consumers, because the possibility of a sale in the secondary market changed the actuarial assumptions on which annuity pricing was based.

In comments submitted to Hudson, the life products committee of the American Academy of Actuaries argued that allowing institutional investors to buy guaranteed living benefit annuities would increase the risk of loss to carriers.

“The reserve and capital requirements would be much higher, and thus the risk charges and other charges associated with the GLB would have to be increased, likely by a significant amount,” according to the Academy committee.

The committee also made the point that the type of annuity contracts that would be most appealing to institutional investors would generally be those belonging to healthier, wealthier individuals.

“Other contract owners may not be able to sell the annuity for more than the account value,” if they were able to sell their contract at all, the statement argued.

Another result of opening a secondary market could be higher prices for consumers and fewer investment choices for their annuity contracts, the committee argued.

The American Council of Life Insurers, Washington, also raised the pricing issue in comments to the IIPRC committee. Unlike average consumers, institutional investors would never find themselves under the types of financial pressures that could force them to take withdrawals or terminate a policy, the ACLI argued.

“If the institutional investor buys GMWBs en masse, it would eliminate the policy holder behavior variable, which will cause the GMWB feature for all purchasers across the board to increase,” the group stated

Writing on behalf of the Life Insurance Settlement Association, Orlando, Fla., Brian K. Stables, president of Right L.L.C., Versailles, Ky., challenged such assumptions. Stables serves as a consultant to LISA on regulatory and legislative issues.

Guaranteed riders could have negative effects on an annuity owner, if they did not perform financially as represented by an insurer or a financial advisor, he observed. In that case, consumers should have the right to turn to the secondary market to evaluate their options, he argued in a letter to Hudson.

“Denying your consumers this right could be detrimental to their financial well being,” Stables said

Robert R. Damron (D.), a Kentucky legislator who is chair of the IIPRC legislative committee, stated in a letter to Hudson that he was concerned about what he called “restrictive language” in the new rule. Damron said his views also reflected those of the National Conference of Insurance Legislators, Troy, N.Y., which had held a hearing on the proposed rules in November.

Damron said he and other legislators “are concerned with the restrictive language that currently exists in the draft of these uniform standards and do not believe that it may be in the best interest of consumers to restrict their ability to seek outside assistance in the settlement of their annuities if they so choose.”

He argued, too, that there was not enough actuarial data available to support insurers’ claims about the potential impact on pricing of allowing annuities to be sold. He also stated that he did not think there was really much interest from the secondary market in buying annuities.

In a related development, the National Association of Insurance Commissioners, Washington, announced on March 3 that it plans to hold public hearing on the emergence of “stranger originated/owned annuities.”

In a related development, the National Association of Insurance Commissioners, Washington, announced on March 3 that it plans to hold public hearing on the emergence of “stranger originated/owned annuities.” (Read more about it here.)

The date and location of the hearing have not yet been determined.

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TABLE

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When Annuities Are Sold In The Secondary Market
States That Voted For The IIPRC Guaranteed Annuity Standards

Ohio (chair)
Wisconsin (vice chair)
Vermont (treasurer)
Alaska
Colorado
Georgia
Idaho
Iowa
Louisiana
Maryland
Maine
Michigan
Minnesota
Missouri
Mississippi
Nebraska
North Carolina
Oklahoma
Pennsylvania
Puerto Rico
Rhode Island
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
Wyoming

Source: The Feb. 22, 2009 teleconference vote of the product standards committee of The Interstate Insurance Product Regulation Commission, Washington, D.C. Indiana voted against the standard.