3 Things to Know About the NAIC's New 0% Annuity Floor Project

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.

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