State insurance regulators are thinking about starting an annuity regulatory project that could remind everyone how hard it is for life insurers to offer great guarantees at a time when safe “single A” corporate bonds are offering an effective yield of less than 1.8%, and slightly edgy BBB bonds are paying 1.97%.
The National Association of Insurance Commissioners (NAIC) is deciding whether to start model law development project to reduce the standard minimum nonforfeiture interest rate for individual deferred annuities to 0%, from 1%.
- Links to NAIC Life Insurance and Annuities Committee documents are available here.
- An earlier article about annuity income guarantees is available here.
A top NAIC committee, the Life Insurance and Annuities Committee, has included the model law development request in a packet of materials for use at an upcoming conference call meeting.
The committee is planning to meet Friday.
Here are three things to know about the proposed project.
1. The People
The Life Actuarial Task Force, a part of the Life Insurance and Annuities Committee, would be in charge of the project.
Mike Boerner, director of the actuarial office at the Texas Department of Insurance is proposing the project.
Kent Sullivan of Texas is the chair of the Life Actuarial Task Force.
Jill Froment is the chair of the Life Insurance and Annuities Committee.
Reggie Mazyck is the NAIC staff support contact person.
The regulators proposing the project need approval from the NAIC’s Executive Committee before they can go ahead with the project.
2. The Meat
The task force would be updating the Standard Nonforfeiture Law for Individual Deferred Annuities (Model Number 805.)
The guaranteed nonforfeiture benefits law affects the minimum interest rate guarantee an insurer can use when determining the cash value of an individual fixed annuity.
Nonforfeiture provisions affect what a contract holder who qualifies for nonforfeiture benefits gets when the contract holder stops making contract payments.
Life insurers can structure the minimum credit rate guarantees included in the annuity contracts to be different, at least in some years, than the minimum nonforfeiture interest rate floor.
States need room to lower nonforfeiture interest rate floors because of the current low interest rate environment, according to the model law development project request form.
The regulators proposing the project contend in the form that the country needs a national nonforfeiture floor standard, and they assert that there’s a high likelihood that they could get the model law change drafted and adopted within one year after they get NAIC Executive Committee approval.
The regulators also assert that there’s a high likelihood that at least two-thirds of the NAIC members would vote to adopt the change, and that many states would adopt the change within three years after the NAIC adopted the change.
3. The Context
An annuity is like a sausage casing stuffed with high-quality corporate bonds and other investments. In theory, life insurers could increase returns on the investments supporting the annuity contracts by adding more common stock and other types of investments, such as mortgage loan. For the life insurers that issue the annuities, one concern is that, during a very bad recession, returns on stocks and other “alternative investments” could fall at the same time returns on high-quality corporate bonds fall, making those alternative investments a poor way to increase returns in hard times.
The Federal Reserve Board and lenders pushed up interest rates on many forms of debt over 10% in the 1980s, both because of efforts to keep up with inflation and because of efforts to curb borrowing enough to help cool down the economy and lower inflation.
At that time, the nonforfeiture floor was 3%, and the typical annuity had a 3% minimum rate guarantee.
In some cases, issuers would create wiggle room by setting the minimum guaranteed rate at less than 3% during the early contract years, and increasing the guaranteed rate in later years, according to an article that Sue Sell and Noel Abkemeier published in a Society of Actuaries publication in 2003.
Bond yields began falling in the 1990s, then plummeted in the early 2000s, in the wake of the terrorist attacks on New York’s World Trade Center complex.
Insurers and insurance regulators have been talking about the nonforfeiture floors, and the minimum rate guarantees included in the contracts, ever since.
The NAIC put a 1% nonforfeiture floor in Model Number 805 in 2003.
— Read ‘Stan the Annuity Man’ Sees Business Booming as Investors Seek Safety, on ThinkAdvisor.