What You Need to Know
- Index-linked variable annuities are also known as registered index-linked annuities, or RILAs.
- Insurers can use index options to create the investment strategy menus and manage product risk.
- Regulators have talked about basing ILVA regulations on the regulations for traditional variable annuities.
- One conflict is over how issuers should disclose how they get paid.
Annuity issuers are asking state insurance regulators to rewrite draft rules for a hot category of variable annuity contracts.
The insurers told the Index-Linked Variable Annuity Subgroup — an arm of the National Association of Insurance Commissioners — that a fee disclosure provision in the draft could eliminate some popular products.
The subgroup is working to develop actuarial rules for “registered index-linked annuity” (RILA) contracts, which are also known as “index-linked variable annuity” (ILVA) contracts.
RILAs, or ILVAs
The issuers of RILA contracts, or ILVA, contracts, build the products around the same kinds of investment indexes at the heart of non-variable annuity contracts. Many contracts base changes in crediting rates on changes in the S&P 500 stock index.
The issuers of RILAs register the contracts as variable annuity contracts with the Securities and Exchange Commission, rather than simply filing the products with insurance regulators.
Building a contract around an investment index, rather than a portfolio of mutual fund-like investment funds, makes running the investment machinery inside the annuity cheap and easy.
Registering the contract with the SEC adds more flexibility.
By registering the contract with the SEC, the issuer gets the flexibility to expose the annuity holder to the risk of loss of principal.
That means the issuer can decide just how much account value it wants to protect, rather than assuming responsibility for protecting full account value under any conceivable condition.
The NAIC’s Life Insurance and Annuities Committee recently formed the ILVA Subgroup because of regulators’ feeling that current variable annuity rules are designed for variable contracts with crediting rates linked to the performance of investment funds, not contracts with crediting rates linked to the performance of investment indexes.
The ILVA Subgroup’s Work
One simple issue ILVA Subgroup members are thinking about is whether regulators should call variable annuities based on indexes ILVAs, RILAs or something else.
The subgroup has also developed a proposed Actuarial Guideline ILVA: The Application of Model 250 to Variable Products Supported by Non-Unitized Separate Accounts.
The draft guideline could show life insurers, insurers’ actuaries and regulators how to apply variable annuity actuarial rules to ILVA contracts.
For regulators, one concern is how to deal with the fact that an ILVA contract issuer ties changes in the crediting rate to changes in the value of one or more investment indexes that occur between the start of an “index term” period and the end of the index term.
The index term could last week, a month, a quarter, a year or longer.
Regulators want to set rules for reporting what an ILVA contract is worth in the middle of an index term, on any given day that an annuity holder checks the contract value.
Fees vs. Spreads
David Hanzlik, an executive with CUNA Mutual Group, is one of the life insurance company executives who commented on the draft.
Hanzlik praised the subgroup for working to develop interim value calculation rules.
Making interim values available could increase consumer interest in ILVAs, he wrote in the comment letter.
But Hanzlik objected to a note in the original draft that states that “any profit provisions, spreads, and expenses should be reflected as explicit charges disclosed in the contract.”
ILVAs are fundamentally based on a spread, or gap, between the performance of the investment indexes used in a contract and the crediting rate, Hanzlik said.
A spread-based design “enables simplicity, transparency, and the financial value our customers seek,” he added.
Jonathan Clymer, an actuary with Prudential Financial, also emphasized that many ILVA contracts are spread-based products, not fee-based products.
The original ILVA actuarial guideline draft “could be interpreted to require that the profit provisions, spread, and expenses be presented as an explicit fee disclosed in the contract, which differs from the design of the product in the marketplace,” Clymer said. “The explicit fee approach would remove simplicity and result in an unnecessary disruption to the ILVA marketplace and impact consumer product choice.”