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Team Drafts Regs for Annuity All Stars

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What You Need to Know

  • The NAIC team is calling index-linked variable annuities ILVAs, not RILAs.
  • Any NAIC model regulation produced could have a major influence on state annuity rules.
  • The model drafting team says the value of an ILVA is the sum of the value of a proxy for the bonds in the portfolio and a proxy for the derivatives in the portfolio.

State insurance regulators are trying to figure out what longtime holders of variable indexed annuities should get when they give up their contracts.

For financial professionals who work with annuities, the real, lasting impact may be that the insurance industry will be more likely to settle on calling those many-named products “index-linked variable annuities,” or ILVAs.

Members of the Index-Linked Variable Annuity Subgroup increased the odds that ILVAs will be called ILVAs earlier this month, when they posted a draft of a new ILVA Actuarial Guideline.

The subgroup is preparing to talk about the draft Nov. 23, in a conference call meeting.

The subgroup’s work could get extra attention because ILVAs have been annuity sales all stars. Wink — a life and annuity tracking firm that has been calling the products structured annuities — says sales increased 118% between the second quarter of 2020 and the second quarter of this year, to $9.9 billion. The products now account for close to one-third of variable annuity sales.


The ILVA Subgroup is part of the National Association of Insurance Commissioners, a Kansas City, Missouri-based group for state insurance regulators.

The NAIC has no direct ability to set states’ annuity rules, but states usually start with NAIC “models,” or samples of bill or regulation language, when developing their own annuity reserve laws and regulations.

Annuity Nonforfeiture Rules

In the United States, a fixed annuity is a product designed so that the issuer promises to pay a guaranteed crediting rate to the annuity holder, and to protect the holder against loss of contract value.

The NAIC’s Standard Nonforfeiture Law for Individual Deferred Annuities (Model Number 805) provides sample fixed annuity “nonforfeiture” rules, or ideas for rules that determine how much cash a fixed annuity holder can get back if the holder gives up the annuity.

The issuer of a traditional variable annuity offers the holder the chance to get a crediting rate that depends more directly on the performance of a portfolio of assets. In exchange for offering the holder a chance to earn more money, the issuer may provide only limited protection, or no protection, against loss of contract value.

The NAIC’s Variable Annuity Model Regulation (Model Number 250) sets the nonforfeiture rules for traditional variable annuities.

The Securities and Exchange Commission regulates variable annuities as securities.

Congress has blocked the SEC from regulating annuities that are classified as nonvariable annuities.

General Account Assets and Separate Account Assets

In recent years, life insurers have started selling products that are registered with the SEC as variable annuities and that offer crediting rates linked to the performance of one or more investment indexes.

An issuer typically ties a crediting rate to the performance of a portfolio of bonds and derivatives that the issuer keeps in its own general account, not to assets held in the annuity holder’s separate account.

Valuing the assets in a traditional variable annuity separate account for nonforfeiture purposes is easy, because the insurer can simply look up the current value of the assets in the separate account.

The new, variable, index-linked annuities are different, because “they don’t have daily values determined by the market prices of the underlying assets,” according to the background section of the new draft ILVA nonforfeiture model regulation. “Instead, they provide interim values defined by contractual provisions. These interim values may or may not reflect the market values of the actual assets held by the insurer in support of the product guarantees.”

ILVAs or RILAs or Structured Annuities

The drafters of the new draft nonforfeiture regulation suggest that one challenge may be deciding what to call variable annuities that tie crediting rates to the performance of bonds and derivatives held in the issuer’s own general account.

Some issuers call the products variable indexed annuities, but other players in the industry say use of that name could revive past disputes about the nature of indexed life and annuity products, and securities regulator involvement.

In the early 2000s, annuity issuers and distributors fought hard to keep the SEC from regulating indexed annuities that were filed as non-variable contracts, and that promised to protect  the holder against loss of contract value, as securities. That fight was one reason industry players shifted from calling the products “equity index annuities” to calling them “fixed index annuities.” (Another reason was issuers’ interest in adding bond indexes, commodity indexes and other types of indexes to index annuity index menus.)

The drafters of the new model regulation say in the background section that there is no established terminology for the products.

“These products go by several names, including structured annuities, registered index-linked annuities, or index-linked variable annuities, among others,” the drafters write. “This guideline refers to them as index-linked variable annuities (ILVA).”

The Draft Model Regulation

An ILVA issuer should be able to use daily values of the assets inside the hypothetical portfolio to determine the market value of the hypothetical portfolio, model drafters say.

The model drafters suggest that the value of the hypothetical portfolio should be equal to the sum of a proxy for the value of the bond holdings in the portfolio and a proxy for the value of the derivatives assets in the portfolio.

The proxy for the value of the bond holdings “represents a zero-coupon bond that accrues interest, simple or compound, over the index term and matures for a value equal to the initial index option value,” according to the draft model.

The draft model authors define the “derivative asset proxy” as being “a package of hypothetical derivative assets designed to hedge the risks associated with guaranteeing the index option value.”

(Photo: Michael Nagle/Bloomberg)