Regulators Work to Keep Hot Annuity Products Fair

State insurance regulators are still shaping actuarial guidelines for a hot retirement savings product — the registered index-linked annuity, or RILA.

A National Association of Insurance Commissioners team is deciding what to do about RILA asset values for consumers who pull cash out early.

The goal “is to avoid designs where, when the index goes down over the interim, the contract holder is stuck with the losses, and, when the index goes up, they do not receive the upside reward,” according to a summary included in an NAIC meeting packet.

Insurers typically apply a “market value adjustment,” to reflect current index rates when consumers take cash out of an indexed product early.

Members of the NAIC panel are debating whether insurers should apply the adjustments to the term for the underlying assets or a term related to the annuity contract provisions, and whether a market-value adjustment should apply to all underlying assets or just to assets classified as fixed-rate assets.

What It Means

For your clients, the point of owning a RILA product might look simple: Buying a RILA is a way to get a product that falls between a traditional variable annuity and a non-variable indexed annuity on the risk-reward spectrum.

For insurers, the point of offering a RILA product might look simple: They can offer a product that resembles a traditional variable annuity, in many ways, but is simpler to manage and simpler and cheaper to hedge.

But, for state insurance regulators who are used to overseeing non-variable annuities on their own and sharing jurisdiction over variable annuities with the U.S. Securities and Exchange Commission, the new annuities raise complicated questions.

ILVA Contract Basics

When a life insurer sells your client an index-linked variable annuity, it may offer the client use of a fixed-rate fund with a crediting rate tied to the performance of its own general account assets.

But the issuer will also offer the client access to one or more crediting rate strategies tied to the performance of investment indexes or exchange-traded funds.

The issuer of a non-variable indexed annuity — often called a fixed indexed annuity — agrees to protect the client against investment-market-related loss of principal. Because the issuer is protecting the holder against investment losses, it can register the product solely with state insurance regulators and avoid having to register the product with the SEC.

The issuer of an index-linked variable indexed annuity registers the product with the SEC. Because the product is subject to SEC rules and oversight, the issuer can expose the holder to the risk of investment-market-related loss of principal.

The issuer of an ILVA contract can offer the client protection against some, all or no market risk, either through the basic contract or through a rider.

The issuer can also use derivatives contracts to protect itself against investment market fluctuations.

That means the issuer of an ILVA contract has two ways to manage market risk: the contract provisions that determine how much market risk it has agreed to assume, and the derivatives contracts.

Mincing Words

In the early 2000s, the SEC fought to get jurisdiction over non-variable indexed annuity products, which were once known as “equity indexed annuities.”

Most life insurers now call those products “fixed indexed annuities,” to reflect the fact that Congress agreed to let issuers keep filing those products as non-variable, state-regulated products, and not as products subject to SEC oversight.

In 2010, some insurers began trying to set themselves apart by developing ILVA products, which offered most of the same features as non-variable indexed annuity contracts but gave them a chance to adjust just how much market risk they were assuming.