National Harbor, Md.— The development of recommendations for the treatment of contingent deferred annuities (CDAs) will continue into the new year with possible conclusions by the time of the spring meeting in Houston, even as federal interest in the product has been piqued.
Currently, the U.S. Government Accounting Office (GAO) is working on a report on the product, and federal agency representatives are monitoring the product, as part of their statutory power to do so, according to reports from the NAIC National Meeting in Washington.
The GAO report, whose Congressional sponsor has not yet been disclosed, is in draft form and is due out in a couple of weeks, according to some NAIC members, and so far does not express any alarm over the product, which it has been looking at along with other products with guaranteed benefits and the capacity of state guaranty funds to handle them, some say.
Concern for the new product is most publicly voiced by Birny Birnbaum, a consumer advocate and economist, of the Center for Economic Justice (CEJ).
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CEJ has concerns about a product it says can create systemic risk, causing insurers to run ashore without enough reserves and suffer the same fate as long term care insurance where promised benefits are slashed or fees increased dramatically.
A CDA is a product that “seems certain to produce either massive profits or catastrophic losses for insurers” according to Birnbaum.
Birnbaum has contended that based on analysis by the CDA subgroup earlier, a “rational investor” purchasing a CDA would invest in the “riskiest portfolio permitted.”
Birnbaum asked the working group, headed by Commissioner Ted Nickel of Wisconsin, to analyze the suitability of the product for consumers.
Indeed, 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,” one actuary who headed a former incarnation of the subgroup on the subject has said.
The developers of the product once compared the protection to the same thing that happens in the property casualty world where protection is purchased and the payout protection is great only if an event occurs, such as a fire with homeowners insurance.
“The likelihood of a consumer realizing a net benefit from a CDA is very small if the covered assets are more conservatively invested. The likelihood of realizing a net benefit from the CDA increases with riskier investments of the covered assets. Any suitability requirements imposed on insurers and producers selling CDAs must incorporate this important characteristic of CDAs,” Birnbaum stated in a letter to Nickel in October.