House Panel to Consider Bill That Might Make Hot Annuities Hotter

Congress could soon give issuers, sellers and users of a popular new category of annuities a boost.

The House Financial Services Committee is to meet Wednesday to consider H.R. 4865, the Registration for Index-Linked Annuities Act, at a hearing on stock exchange regulation.

The committee will consider the registered index-linked annuity, or RILA, bill, along with a number of other securities bills and bill drafts, including a securities exchange liability bill and a bill that could support the creation of exchanges designed solely for trading of securities associated with venture capital-backed startups.

If H.R. 4865 is passed and implemented as written, and works as supporters predict, it could streamline federal compliance chores for RILA contracts.

What It Means

Insurers like offering RILAs, because administering RILA programs is relatively affordable, and the fact that they are registered as securities helps an insurer decide just how much investment risk to assume.

Issuer support for the products has pushed sales higher.

Wink, an annuity sales data vendor, says RILA sales increased 20% between the fourth quarter of 2020 and the fourth quarter of 2021, to $10 billion.

H.R. 4865 could lead to further increases in RILA use.

The Insured Retirement Institute has written a letter supporting the bill.

RILA Background

RILA contracts are annuities registered with the SEC as variable insurance products, as well as with state insurance regulators.

Because a RILA contract is registered as a security, the issuer can choose to expose a holder to the risk of loss of account value.

The issuer of a traditional variable annuity packs investment funds that resemble mutual funds inside an annuity. The holder gets an interest rate, or crediting rate, tied partly or wholly to the performance of the investment funds.

The issuer of a RILA contract puts derivatives tied to the performance of an investment index, such as the S&P 500 stock index, rather than investment funds, inside the annuity package. For the issuer, using derivatives to power the crediting rate is usually cheaper than using investment funds, and arranging to hedge against derivatives volatility risk is usually cheaper and easier than hedging against investment fund volatility risk.

Regulators and trade groups are still discussing how to name RILA products. Many issuers and the Secure Retirement Institute, an industry research organization, have adopted the term “RILA.”

A National Association of Insurance Commissioners panel has been using the term “index-linked variable annuity.”

H.R. 4865 and S. 3198 Details

Today, a life insurer that sells RILA contracts must register the product with the SEC using the same S-1 and S-3 forms used to register big, publicly traded companies.

That means that registering a RILA product might require almost as much time and money as registering for the initial public offering of the insurance company writing the contracts.

The RILA bills call for the SEC to create a new, relatively simple registration form designed for RILAs.

The bills would also establish a federal definition of “registered index-linked annuity” and classify a RILA as a security.

Legislative Mechanics

Rep. Alma Adams, D-N.C., has introduced H.R. 4865 and lined up 29 co-sponsors: 15 Republicans and 14 Democrats.

Sen. Tina Smith, D-Minn., has introduced S. 3198, the H.R. 4865 companion bill. That bill has one co-sponsor — Sen. Thomas Tillis, R-N.C.

The bill could move through Congress on its own, get packaged together soon with the RISE Act bill or get packaged with a “must-pass” bill — a budget bill, for example — later.

SEC headquarters in Washington (Photo: Diego M. Radzinschi/ALM)