Center for Economic Justice's Birny Birnbaum, courtesy CEJ, Birnbaum

Consumer representative to the insurance regulators, Birny Birnbaum, and his Center for Economic Justice, is not relenting on the problems he finds with contingent deferred annuities (CDAs), calling them a dangerous product for consumers in a letter to regulators.

“CDAs are a dangerous product for consumers. CDAs pose additional risks compared to other insurance products, which promised consumer benefits far into the future and which have either proven to cause harm to consumers long after the consumer’s choice of alternative investments is gone or for which insurers have changed key terms of the product to alter the value proposition long after the consumer’s choice alternative investment is gone,” Birnbaum wrote, referring to long-term care insurance (LTCI) and variable annuities with guaranteed lifetime withdrawal benefits (GLWB).

The comments were made Aug. 20 to the National Association of Insurance Commissioners (NAIC) Life Insurance Committee regarding draft charges for the CDA Working Group.

Birnbaum calls for the appointment of a new group to identify potential consumer protection issues associated with CDAs and for consumer protection requirements related to their sale and administration. In the comments, Birnbaum claims that CDAs are more dangerous than LTCI or variable annuities with GLWB “because the CDA is effectively a naked option on the market value of the consumer’s investments.”

Birnbaum, a longtime NAIC funded consumer advocate and also a member of the Federal Insurance Office’s (FIO) Federal Advisory Committee on Insurance (FACI), then dives into the recent cutbacks insurers are instituting with existing customers of variable annuity with GLWBs, changing the basic value of the product long after consumers had an option for an alternative investment.

The economist and former regulator links these issues with future problems for CDAs, stating that even the NAIC CDA subgroup noted that the likelihood of an insurer paying a benefit under GLWB or a CDA, which he says is simply a GLWB without the underlying annuity, is highly correlated with the riskiness of the investments allowed by the consumer. 

The CDA subgroup demonstrated that a consumer purchasing a CDA and investing in bonds had a very small likelihood of collecting a CDA benefit, he stated.

Over the past couple of years, Birnbaum noted, many variable annuity insurers have clamped down on fund choices, raised fees, forbidden additional account contributions and sought to buy back the contracts, and in one of the latest efforts, Hartford Financial Services is requiring owners of certain guarantees to move at least 40% of their money into bond funds — and lose their guarantee if they fail to transfer the money out of stock funds.

“If you do not allocate your contract value in accordance with the Investment Restrictions” by Oct. 4, the guarantee “WILL BE REVOKED,” according to a letter Hartford is sending out to customers, Birnbaum noted, citing the Wall Street Journal in a piece from June 24, 2013.

The NAIC group has proposed a CDA definition that makes it an annuity contract, one that establishes a life insurer’s obligation to make periodic payments for the annuitant’s lifetime when the investments, which are not owned or held by the insurer, are depleted to a contractually-defined amount due to withdrawals, market performance, fees and/or other charges.

The NAIC working group states now that CDAs do not easily fit into the category of fixed or variable annuity, that review of solvency and consumer protection standards are necessary, as well as tools to assist states in reviewing CDA product filings. Solvency oversight of CDAs should be also established, they argue.

In a recent conference call, the working group referred several separate CDA pieces to different subgroups. Reserving requirements goes to the Life Actuarial Task Force, while the risk-based capital (RBC) requirements goes to the Financial Condition Committee and Life Risk Based Capital Working Group. Financial reporting requirements, including possible changes to the annual statement blank, goes to the Financial Condition Committtee as well.

Birnbaum said the NAIC’s proposed charges to various working groups and task forces do not include a charge related to a review of consumer protection standards. Rather, the proposed charges appear to be geared towards clearing any regulatory hurdles for the CDA, instead of identifying dangers to consumers and proactively stopping consumer harm.

No doubt these issues will be raised at the NAIC meeting in Indianapolis within the next week.

Prudential Insurance Co. helped develop CDAs. It declined comment today, although it has been a champion of the product, and has explained how it captures a customers investments and annuitizes them wherever they are held.

The New York Department of Financial Services, (DFS) using a state 2009 circular letter, does not see CDAs as annuities, but as financial guarantees.  The Insured Retirement Institute (IRI) has consistently held that contingent annuities are annuities under state law. The American Council of Life Insurers (ACLI) today stated that “CDAs provide consumers the protection of guaranteed lifetime income and offer consumers another solution to consider for their retirement needs. The industry will continue to work constructively with regulators as they further evaluate the appropriate regulatory framework for CDAs.”