Hot Annuities Face SEC Form Reviewers

A Securities and Exchange Commission form reviewer said Thursday that he wants to make sure life insurers give investors a clear picture of how their registered index-linked annuity contracts will work.

Michael Kosoff, an attorney on the staff of the SEC’s Division of Investment Management, talked about how that goal affects RILA filing approvals at the Life Insurance Products Conference, held recently in Washington, D.C. Organized by American Law Institute Continuing Legal Education, the conference attracted faculty members from major law firms, the SEC and FINRA.

Kosoff emphasized that he spoke only for himself, not for the SEC or his colleagues. But he did talk generally about the kinds of form provisions that can speed or slow the movement of a form through the SEC review process.

What It Means

The views of Division of Investment Management form reviewers may influence how your clients’ RILA contracts work.

Kosoff’s Role

Kosoff started with the SEC as an attorney in its Office of Insurance Products in 2005. He has participated in the consideration process for variable life and variable annuity products filed by companies such as Equitable, Mutual of America, Northwestern Mutual, Pacific Life and TIAA.

He appeared at a life products conference session on RILA regulatory and disclosure developments.

RILAs

Life insurers can stick with limiting non-variable life and annuity products with state insurance regulators. When products expose customers to the risk of investment-related loss of principal, the issuers must file the products with the SEC as well as with state insurance regulators.

RILAs are annuity contracts that can expose the holder to the risk of investment-related loss of principal, but that tie crediting rates at least partly to the performance of investment indexes, rather than to the performance of investment funds that resemble mutual funds.

A Crediting Strategy That Lasts

Dodie Kent, an Eversheds Sutherland partner, asked Kosoff about reports that the SEC staff often wants life insurance company clients to say which crediting strategy the clients guarantee will be available for the life of a RILA contract.

A crediting strategy includes a reference to a particular investment index, such as the S&P 500, and other terms that affect the contract crediting rate, such as any built-in limits on how much the annuity purchaser can lose in falling markets or gain in rising markets.

Many RILAs use investment indexes licensed from outside organizations, and life insurers want the freedom to change index menus because of changes in licensing arrangements, the need to manage market risk, and other considerations, Kent said.

Kosoff said the SEC staff began asking about crediting strategy stability because it saw issuers including a provision stating, “After the first year, we can terminate any and all options currently available.

“So, in essence, after year one, investors have no idea what they’re getting,” Kosoff continued. “That rubbed us the wrong way. There’s different ways we could resolve this. We could require skull-and-crossbones disclosure on the cover page, saying, ‘Hey, you have no idea what you’re getting after year one.’ I doubt insurers want to include that. An alternative was to pick one index strategy that will always be available.”

Issuers include other filing provisions that let them change the index in extraordinary circumstances, but the credit strategy stability approach means that at least one crediting strategy available through a RILA will still have the same term, minimum participation cap and rate floor, Kosoff said.

Maximum Loss

Other panel participants also asked Kosoff about an SEC requirement that RILA issuers show the maximum amount a buyer can lose.

Kosoff said new rules require issuers to show the maximum dollar value of charges or losses, not simply to provide a formula or a general description. He noted that some issuers tell him that, in theory, an annuity holder could lose 100% of the cash deposited, but that this would never happen.

“If you think it will never happen, you can cap it,” Kosoff said. “But the investors have to be put on notice about the maximum amount they can lose.”

Kent said some insurers are addressing the requirement by including warnings stating that investors can lose 100% of their investments.

Index Disclosures

Kosoff said an issuer using the S&P 500 index might need to put just two or three sentences in a description of risk factors.

For a more complicated index that comes with risk management features and other features, “we would require more disclosures,” he said. “Simpler indices, simpler disclosures. If you have a more complex index, investors need to know what they’re getting.”

Filing Mechanics

Kosoff also talked about filing and form details.

He recommended, for example, that insurers submit filings as early as possible, rather than at the last minute, and that insurers state clearly, on the cover sheet, if a product update filing includes no material changes.

He also discussed the personalities of the different product filing forms.

Insurers may file products on N investment company forms, S-1 registration statement forms or S-3 simplified registration forms.

Life insurers that simply want to update the rates and limits in RILA contracts, rather than making substantive changes to the terms, can do so by dropping in rate sheets, if they have filed the products using N forms or S-3 forms, Kosoff said.

Issuers have to go through another process to update products filed using S-1 forms, he said.

One reason for the difference between the N form update process and the S form update process is that the SEC’s Division of Investment Management manages the N forms, and another arm, the Division of Corporation Finance, manages the S forms, Kosoff added.

The Futurology Problem

Faculty members at the RILA session also talked about efforts by the National Association of Insurance Commissioners to develop an actuarial guideline that would apply to RILA contracts.

The guideline would affect how much cash RILA contract holders can get out if they drop contracts early.

Kent said the effective date could be July 1, 2024.

Because the guideline would define and name some of the product features to be used in the interim value calculations, the guideline could also influence other RILA regulatory efforts.

One effect of the NAIC’s work is that the NAIC is calling the products index-linked variable annuities, and many people are starting to shift to calling the products ILVAs, rather than RILAs, according to Kent.

Jonathan Clymer, an actuary with an insurance subsidiary of Prudential Financial, said another issue is that some states are already asking life insurers how their RILA products will mesh with the actuarial guideline, even though the NAIC is still working on the guideline and it is not yet entirely certain what the guideline will look like.

Pictured: A detail from the SEC building. (Photo: Diego M Radzinschi/ALM)