Today’s annuities have very advanced concepts and benefit characteristics–market value adjusting, separate investment accounts, indexing and guaranteed living benefits, to name a few.
What the industry needs now is a standardized illustration process for those products.
To see why, it helps first to review some developments from the life insurance side of the business, and the lessons learned there–in particular, the evolution of modern day life products and the eventual delivery of a standardized illustration requirement on Jan. 1, 1999 (via the Life Illustration Model of the National Association of Insurance Commissioners).
Life products in the 1980s and 1990s were refreshed and revitalized through innovation, delivering new and more sophisticated designs to the market. This surge closely resembles the annuity product development of the last 10-15 years.
But the pioneering of new concepts and revolutionary product designs at breakneck speeds made it difficult for insurers and regulators to maintain reasonable controls to ensure consumers could understand the dynamic designs.
One example is the “vanishing-premium” design and the crisis it spawned. The design involved illustration proposals that introduced the paid-up concept on products requiring lifetime premium payments. Here, the premium outlay, beyond the “paying period,” was sustained by the accrued interest generated by historically high interest rates.
But, as is widely known, interest rates normalized over the years, so these products received far less interest crediting than projected. That resulted in the paid-up policy year set points being significantly extended. The response? Development of the first standard for life insurance illustrations (via the 1999 NAIC Model) and several new enhanced disclosure and comparison requirements. There was also a new focus on suitability standards.
These responses produced true 360-degree coverage: They aimed at improving suitable sales to empower agents to do the right thing, and requiring disclosures and standardized illustration requirements to empower clients to make the right choice.
It’s important to note that the vanishing-premium debacle involved just one assumption and one concept, but it precipitated a never-before-experienced consumer onslaught that brought about a new era of consumer disclosures in life insurance.
This is not to suggest that the annuity marketplace runs the risk of a similar interest rate conundrum.