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State insurance regulators say they have heard the complaints about unhinged annuity performance illustrations and want to do something.
The Life Insurance and Annuities Illustrations Working Group — the arm of the National Association of Insurance Commissioners that's responsible for updating the product illustration rules — suggests in a new request for comments that it might develop both a simple, short-term solution and a longer-term response that would overhaul how insurers, agents and advisors show consumers how annuities might work.
The working group is asking in a notice posted on its section of the NAIC website whether it could create a short-term solution by updating the annuity illustration standards in the NAIC's Annuity Disclosure Model Regulation, which is also known as Model 245.
The working group also asked for comments about whether it could create a patch by updating another NAIC document or starting from scratch.
"If starting anew, then how can the scope be limited to ensure progress towards a short-term solution before a longer-term solution is developed?" the working group asked.
Comments are due May 18.
The working group previously posted a request for comments about approaches it could use to make disclosures about future product performance more reasonable. The working group has posted 11 responses to the earlier request for comments.
What it means: If you are using annuity illustrations showing that a fixed annuity could generate an internal rate of return of 14% per year for 25 straight years, state insurance regulators are unhappy with you.
Annuity illustrations: An annuity or life insurance illustration is supposed to show a consumer how the product might operate in different situations.
An illustration is not supposed to provide a forecast showing the consumer how the product issuer, agent or advisor thinks the product will perform.
Model 245: The NAIC adopted Model 245 in 1998 and has updated it several times. But, as of 2020, only five states had adopted Model 245.
Representatives for the American Council of Life Insurers, the Committee of Annuity Insurers and the Insured Retirement Institute asked the working group to start by looking at how the model is working in the states that have adopted it.
"Any future work should be grounded in an understanding of how the current framework is, or is not, meeting the needs of regulators and consumers in states that have adopted the model and states that have not adopted the model," the trade group reps told the working group.
Cannex Research, a data analytics firm, told the working group that Model 245 includes provisions that can encourage insurers to create misleading product illustrations.
One section, for example, appears to let an insurer provide an illustration that keeps the first-year interest rate and the other first-year parameters the same for all illustrated years.
"The current regulation does not distinguish between an introductory rate and a sustainable renewal rate," Cannex said. "This problem is compounded in products that feature high premium bonuses. In a bonus product, the insurer provides upfront account value growth (the bonus) in exchange for lower credited growth in subsequent terms."
Cannex noted that a consumer who buys an annuity with a big first-year bonus usually pays relatively high charges or receives relatively low returns in later years.
Even though the insurer expects the second-year crediting rate to be lower than the first-year rate, Model 245 lets the insurer create an illustration that uses the high first-year rate for all years illustrated, Cannex said.
"The illustration fails to reflect the intended economic trade-off embedded in the product design, producing a materially inflated trajectory of account value growth," the firm warned.
Illustrations vs. forecasts: "Even if the agent doesn't specifically intend to use the illustration as a projection of outcome, the consumer will almost always interpret the illustration as a projection," Richard Weber and Gerard Vanderzanden, two representatives of the Life Insurance Consumer Advocacy Center, wrote in a response to the working group's previous request for comments.
The advocacy center reps and Tomasz Serbinowski, an actuary with the Utah Insurance Department, called for making illustrations look less like performance forecasts by taking numbers out of the illustration charts or by using round numbers capped by regulators, such as 0% or 5%.
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