Contingent annuities function in a very similar manner to products with guaranteed lifetime withdrawal benefit (GLWB), with the basic framework already in place at the state level for them to be regulated as annuity products, according to a report by the American Academy of Actuaries (AAA) during a NAIC teleconference.
The products enable the use of existing accumulated assets for guaranteed lifetime income without requiring policyholders to transfer their assets to an insurance company, declared the AAA report, delivered on Dec. 22.
The NAIC’s Contingent Deferred Annuity Subgroup (CDAS) of the Life Insurance and Annuities (A) Committee is considering the nature of these financial products, which many in the insurance industry and in the regulatory arena believe can be a valuable product for those who are concerned that they will outlive their assets. See: http://www.lifehealthpro.com/2011/11/06/naic-to-scrutinize-contingent-annuities
However, there has been some concern by some companies and regulators that the products are not even annuities, but instead are financial guaranty products.
The AAA analysis by its Contingent Annuity Work Group (CAWG) sought to clarify this issue by noting that financial guaranty insurance products, like bond insurance, protect against specific types of financial losses and contain no life contingent element. Life annuities, on the other hand, protect for a lifetime and protect against outliving one’s assets, and contain a life contingent element, the AAA noted, so the product is a longevity protection product.
The AAA did hold that contingent annuity covered assets differ from those of GLWBs because they are external to the life insurance company. GLWBs provide guaranteed lifetime income based on the value of insurance company held assets.
The relationship between market performance and contingent annuity payments is indirect, the AAA further stated.
The regulatory framework that is already in place includes most states’ adherence to the NAIC models for reserves and capital for GLWBs and all states’ existing procedures for approval of GLWBs, according to the AAA report.
Any differences and similarities to GLWBs should be disclosed in product filings, the AAA advised the NAIC.
The statutory reserve guidelines for CDAs or CAs are the same as for GLWBs and are addressed under Actuarial Guideline 43,(AG 43) the statutory risk-based capital requirements for contingent annuities are also addressed by current requirements and both are generally risk-managed through capital markets hedging programs by life insurers, the AAA pointed out.
The issue, which came to a fore at the NAIC fall meeting, divided some, even as most agreed the product is valuable for consumers.
A contingent annuity is essentially a stand-alone guaranteed living withdrawal benefit, Olsen had told regulators at the NAIC Fall meeting.
The AAA working group also looked at an IRS tax treatment, a Securities and Exchange Commission (SEC) treatment, a nonforfeiture treatment, as well as state guaranty fund coverages to reach its conclusions.
In several private letter rulings, the IRS ruled that CAs are considered annuities for tax purposes and at the SEC, CAs, like GLWBs, are generally registered as securities (except for certain qualified retirement plans), the AAA pointed out.
“The product had a material longevity component, and the life industry has the experience to manage these risks,” Olsen said.