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.