Team Drafts Regs for Annuity All Stars

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)