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.