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February 09, 2012 at 09:46 AM
And it’s a … hybrid.
Contingent deferred annuities (CDA) are a hybrid product, the NAIC regulatory subgroup working on classifying and evaluating the product, believes at this point, it has announced.
Insurance departments could regulate the product as an “annuity” after through reviews/adjustments, especially modifications in reserve methodologies (AG 43), and the filing process for guaranteed lifetime withdrawal benefit features, according to the subgroup’s discussion.
CDA Subgroup Chair and the New Jersey Department of Banking and Insurance’s chief actuary Felix Schirripa told industry on a conference call Thursday that the group has come to believe the product is a hybrid of an annuity and a financial guaranty product, contrary to the beliefs of many industry actuaries.
Industry support for the CDA as an annuity has been great, with the notable exception from MetLife. See: http://www.lifehealthpro.com/2012/01/19/metlife-and-pru-square-off-over-contingent-deferre?page=2
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 in a letter last month.
However, regulators need to decide if there needs to be a new supervisory mechanism established with elements of both the annuity and the financial guaranty models, unless there is another path. See: http://www.lifehealthpro.com/2012/01/26/cdas-under-scrutiny-what-happens-if-they-fail-regu
One regulator noted that if a company wasn’t writing the product now, it should hesitate to start until the regulatory landscape became clearer-and if a company is writing them, it should reserve conservatively.
Companies are clamoring to sell them, while regulators evaluate the risk, which MetLife has stated it is wary of. There is another state besides New York which considers the product a financial guarantee product, Schirripa suggested on the call, in response to Great-West Life & Annuity Insurance Co. official calling the New York regulatory opinion an “outlier.”
Schirripa said on the call that the product can indeed potentially benefit consumers with its longevity protection, but presented possible design changes to make the product more palatable to regulators, and add more disclosures and consumer protections.
With regard to longevity risk, it is real only if buyer behavior “is efficient and moves into a higher risk/reward portfolio,” but “there is no meaningful longevity protection if the covered portfolio is too conservative, or …(if) the policyholder behavior is sufficiently inefficient,” Schirripa warned.
Insurers would have to emphasize that the purpose of CDA is lifetime income protection, not asset preservation and explain what happens to guarantee if policyholder wishes to fire manager “for cause” or underperformance, according to the CDA discussion guide on policyholder behavior and product design that Schirripa prepared.
