Index Proposal Could Make Some Annuities Look Too Good: Consumer Group

The Center for Economic Justice (CEJ) says a new indexed annuity regulation proposal could help dishonest life insurers fool consumers.

The proposal could affect how life insurers illustrate the performance of indexed annuities featuring relatively new investment indexes.

If regulators aren’t careful, new annuity illustration rules could help a life insurer hide how an investment index would perform in a bad market downturn, the CEJ says.

(Related: Insurers Ask NAIC to Ease Annuity Index Illustration Age Rule)

The drafters of the proposal might have had good intentions, but “the change is an invitation to data mine recent historical returns to create an index favorable for illustration, but which dramatically misrepresents the actual risk-return situation for the consumer,” the CEJ writes in a comment letter sent to the Annuity Disclosure Working Group.

One problem, the CEJ says, is that an insurer could use a 10-year-old investment index to hide what might have happened to an annuity holder during the 2007-2009 Great Recession.

Providing  a clear, complete illustration is critical, because, these days, illustrations have more effect on what consumers buy than the other required disclosure documents do, the CEJ says.

Indexed Annuity Illustration Revision Background

The Annuity Disclosure Working Group is part of the National Association of Insurance Commissioners (NAIC), a group for state insurance regulators. The NAIC cannot normally change state insurance laws and regulations itself, but states often use NAIC models when they start to draft their own insurance laws and regulations.

The Annuity Disclosure Model Regulation (Model Number 1998) was first adopted in 1998 and has been revised several times.

The current version of the model prohibits annuity issuers from illustrating the performance of investment indexes that are less than 10 years old.