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MetLife and Pru Square Off Over Contingent Deferred Annuities

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MetLife is not only standing firm in its argument that contingent deferred annuities (CDAs) are instead financial guaranty products, it is ringing the solvency bell as a warning to insurance regulators about other life insurers who might underwrite the product as an annuity. 

Metlife said as much in a letter to the NAIC on Jan. 18. Regulators weighed in on a conference call on Jan. 19, struggling with the product’s classification, as MetLife and its business rival (but usual regulatory ally) Prudential Insurance Co. of America prepared to go to the mat with their positions.

The group that represents U.S. life insurance industry, the American Council of Life Insurers, told the regulatory working group of the NAIC working on the issue that CDAs are indeed annuities, not financial guaranty insurance, according to all but one of its subgroup members.

In a letter of its own, also dated Jan. 18, the ACLI stated “the strong consensus of Subgroup members, with one dissenting member, is that CDAs are annuities, not financial guaranty insurance.” The letter was signed by ACLI counsel Kelly Ireland.

“CDAs have an appropriate place in the insurance marketplace to help address growing consumer demand for guaranteed lifetime income solutions and should continue to be regulated as annuities,” the ACLI stated.

MetLife, opposed the statement, even questioning the thinking of its ACLI brethren, of which Prudential is the weightiest advocate before the NAIC.

“…we cannot understand why our peer companies are not as concerned with the amount of capital and reserves needed to support the product,” stated the letter signed by Eric DuPont, government relations counsel for MetLife Life Insurance Co. in Boston. 

Underwriting CDAs as annuities could even cause financial problems to those companies, MetLife warned the NAIC. It added that such demand–if it in fact existed–combined combined with the difficulty of determining adequate reserving, could lead to solvency concerns for companies that have not adequately supported their CDAs.

“Relative to variable annuities with living benefits, we believe the amounts required to support CDAs would be potentially higher and more volatile (again, since these reserve and capital requirements look at both the base contract and the guaranty and the contingent annuity does not have the base contract to provide stability),” MetLife warned senior NAIC life and health policy staff. 

MetLife outlined at length its very significant concerns with the CDA product. 

“These concerns include that the product is financial guaranty insurance, sundry financial issues (including the difficulty in determining adequate reserves for the product), that common forms of the product fail to conform with group insurance laws, and suitability issues,” stated the MetLife letter.

Supporters of CDAs stress the similarities they perceive to exist among CDAs and variable annuities with living benefits but there are fundamental differences between their financial aspects, MetLife argued.

“In a variable annuity, the insurer offering the guaranty selects the available investment funds at issue, and on an ongoing basis. In a CDA, the same level of control may not exist. ….In a variable annuity, the issuing insurer receives fees and profits from the base annuity as well as the guaranteed benefit. The fees on the base annuity can provide some risk mitigation and cushion. In a CDA, the insurer only receives the fees and profits from the guaranteed benefit,” MetLife explained.

Supporters of the product as a CDA raised the longevity protection element.

“Measurement and management of the risk (including hedging) associated with the guaranty on a CDA can be a more difficult undertaking than with variable annuities with living benefits,” MetLife argued.

During the call, one person called the product “risk on steroids.”

“How can I convince the subgroup that it is longevity protection when it is instead charging for market risk?” asked Felix Schirripa, chief actuary of the New Jersey Department of Banking and Insurance, whose state heads the NAIC’s CDA Working Group. Schirripa further asked how the product could be justified as an annuity.

When asked if he was concerned about reaching a conclusion that would anger his largest domestic, Prudential, New Jersey Commissioner (and former MetLife executive) Tom Considine responded: “No. We will go where the facts and our professional opinions take us, in our best judgment.”

NAIC Managing Counsel Dan Schelp, also on the call, stepped in to note that while the NAIC had not formed a legal opinion yet, it cannot ignore a New York law pointed to by MetLife that classifies the product as financial guaranty insurance and said, while New York is not controlling, it needs to be reviewed.

New York State has a financial guaranty law that follows the NAIC model and New York regulators have determined that CDAs are financial guaranty insurance under Article 69 of the Insurance Laws of New York, its statute governing financial guaranty insurance. 

In addition to New York, the laws and/or regulations of numerous other states–including Alaska, California, Connecticut, Florida, Iowa and Maryland–have the same provision of the NAIC model law that would support a determination that a CDA contract constitute financial guaranty insurance, MetLife noted in its letter.  

Prudential and others, who support the classification of the product as an annuity, said New York had publicly stated it was reevaluating the 2009 rule. MetLife, on the call, said New York was doing so at the behest of companies like Prudential.

“It is?” surprised NAIC people asked.

However, the outcome may be neither one nor the other, as the product doesn’t fit into an easy pcoket in some states. With this kind of product, additional regulations or guidelines are going to be needed to properly address contingent annuities, rather than try to fit them into  current regulations and guidelines, at least one actuary has expressed.

 Consumer advocate and economist Birny Birnbaum of the Center for Economic Justice also protested the classification of a CDA as an annuity and said it fit the definition of a financial guaranty product. 

The letters came in advance of, and the discussion at the end of, a conference call of interested parties and regulators to hear a presentation by Cande Olsen representing the Contingent Annuity Work Group of the Life Products Committee of the American Academy of Actuaries (AAA).

Her presentation dealt with a comparison of the lifetime income generated by a typical contingent annuity design versus self-insurance (no benefits or fees).

Previously, the AAA group used its model to demonstrate that a typical CA design, similar to CA products in the marketplace today, includes a material life contingent component.

The NAIC Contingent Deferred Annuity Working Group will continue its discussion next week in a conference call, it promised. New York regulators had no comment to the press on whether they were seeking any reevaluation of (OGCOp. No 09- 06-11, dated June 25, 2009), that determined CDAs are financial guaranty insurance under Article 69 of the Insurance Laws of New York.