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Life Health > Annuities

NAIC Issues Bulletin Against Stranger-Originated Annuities

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The National Association of Insurance Commissioners (NAIC) adopted several items at its met via conference call Tuesday evening, held to replace the cancelled Summer National Meeting in Philadelphia, one of which is a bulletin on stranger-originated annuity transactions (STOAs). 

The bulletin encourages insurance companies to establish safeguards to prevent or limit exposure to STOA transactions. Created by the NAIC Life Insurance and Annuities Committee, the bulletin encourages insurers to put safeguards in place to prevent or limit their exposure to STOAs.

STOAs have been a concern for awhile, even now that the overall market for them has quieted down. 

The battle over stranger-originated annuities is part of a larger battle over the insurance product resale market, representatives from an insurer group and a life settlement group agreed when they appeared at a STOA hearing in May 2010 organized by the Life and Annuities Comittee at the NAIC in Kansas City, Mo. Witnesses from the American Council of Life Insurers, Washington, and the Life Insurance Settlement Association, Orlando, Fla., appeared Thursday at a STOA hearing  have joined with other groups in condemning STOAs.

Like stranger-originated life insurance transactions (STOLI),  STOAS involve a producer and/or investor approaching an individual, who is usually a “stranger” to the producer and/or investor, and offering a nominal fee for the use of the individual’s identity as the annuitant in an investment-oriented annuity, the bulletin explains. Typically, individuals targeted to serve as annuitants are in extremely poor health and are not expected to live beyond the first year of the policy.

To avoid added scrutiny of the policy or detection of the scheme, producers involved in STOAs will often take precautions to ensure that the dollar amount of the annuity falls below specific underwriting guidelines. A trust or an organization may additionally be named as beneficiary of the annuity in order to hide the true identity of those who will benefit from the annuitant’s death, the NAIC bulletin explained.

The producers often also add particular riders, such as a bonus rider or put a guaranteed minimum death benefit in place to maximize the rate of return for those financing the transaction, the NAIC bulletin warned. 

“As the financial implications of STOA transactions could be detrimental to both companies and consumers, it is suggested that companies do the following,” the bulletin states:

  • Review chargeback policies and consider reserving the right to adjust commissions if a policy is annuitized or a death benefit is paid within its first policy year and the facts indicate the policy was used to facilitate STOA transactions.
  • Create detection methods to identify STOA transactions and those producers who may be involved in facilitating such transactions, including controls to flag questionable applications.
  • Revisit annuity application processes to ensure that specific questions are posed with regard to the relationship between the annuitant and contract owner, and the manner in which the contract is being funded.
  • Report actual and potential STOA transactions to the appropriate state Department of Insurance.  

The NAIC also adopted amendments to Annuity Disclosure Model Regulation to increase uniformity, improve disclosure and reduce consumer confusion with regard to the purchase of annuities. Insurers get uniform guidance on developing disclosure information and address the increasing use of annuity illustrations during the sales process, improving the requirements for an illustration’s development.

The NAIC also adopted reports from various committees, including the Health Insurance and Managed Care Committee at its meeting.


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