Insurers Delay Contingent Annuity Launches
October 4, 2011 by Linda Koco
By Linda Koco
Contributing Editor, AnnuityNews
A number of insurers are delaying launch of contingent annuity products, according to a trade association executive who spoke at a phone conference of state regulators late last week.
They are waiting for state insurance regulators to decide how they intend to deal with the products, said Lee Covington, senior vice president and general counsel at the Insured Retirement Institute (IRI), Washington.
The regulators are members of the Life Insurance and Annuities (A) Committee of National Association of Insurance Commissioners (NAIC). They are trying to determine whether contingent annuity products are in fact annuities or another type of product such as financial guarantee insurance.
The products are relatively new retirement income contracts. They allow the investor to start taking guaranteed minimum withdrawals from investment funds after the investor reaches a specified age. If the withdrawals ever exhaust the account value, the insurer then issues the investor a “certificate of insurance” that says the payments will continue in the same amount for the rest of the investor’s life.
Covington said that IRI “strongly believes” that the products are annuities.
More than 45 states have reached this conclusion and approved the products, and so has the Internal Revenue Service (IRS), he added. The reference to the IRS was to several Private Letter Rulings that IRS has issued on the products.
“If a different conclusion is reached, that means 77 million baby boomers won’t have access to this type of longevity production,” Covington continued. He urged the commissioners to work on the regulatory issues as expeditiously as possible.
At issue is not just whether the products are in fact annuities but also whether the product filings are clear enough for regulators to assess.
Lee Sellmeyer, a regulator in the Iowa Insurance Division, Des Moines, said he thinks the products look like variable annuities with an insurance company carve-out for guaranteed withdrawal benefits — but with the underlying funds being owned by the client.
A problem with the product filings
However, in reviewing various filings for the products, Sellmeyer said he has noticed things that “some would say are deceptive or confusing at least.”
For instance, regarding the certificates the product issuers will provide, regulators have had to ask for a copy of the group contract, Sellmeyer said. The problem is, “it’s easy to not fully comprehend that the group contracts are a mirror image of the certificate and nothing more,” he said.
Another regulatory concern has to do with the underlying assets. The insurance company doesn’t own those assets, Sellmeyer said, but the assets are still under the control of the insurance company. This control is related to the “asset allocation programs or retirement-dated programs that are similar to what you might see in a normal mutual fund,” he said.
The main issue here is control, he contended. “How do you really control something they are managing remotely? How do you examine that? It’s a lot more serious than suitability, where someone certifies that ‘I’m doing what I’m supposed to be doing.’ ”
To do this properly, he said, it looks as if the firms “need to have a high-tech system to report back daily to the insurance company and to manage the system effectively to be sure they have the right reserves.”
The product design can be a lot more problematic when the products take an alternate approach, added Committee Vice Chairman Thomas B. Considine, commissioner of the New Jersey Department of Banking and Insurance. To illustrate, he pointed to contingent annuity products in which the insurance company has nothing to do with the underlying assets. Instead, “the assets sit in and are totally controlled by an unrelated asset manager or mutual fund company.”
Industry response
Industry representatives largely defended the products as annuities. For instance, Brian Pinsky, vice president of product development at Prudential Annuities, says his company feels strongly that the products are annuities and not financial guarantee insurance.
His reason: The products don’t recoup any losses the investor may experience in the underlying assets, but the products do provide a guaranteed lifetime income stream, he said. The income stream is contingent upon two things, he added. One is exhaustion of the underlying assets and the other is the investor must be alive at that point in time. The payments will then continue until the investor’s death.
That said, Prudential is in support of transparency and consistency in regulation of these products, Pinsky added.
Keith Mancini, Great West Life, said he echoes the previous industry comments. In addition, he offered his company’s help in adding “clarity and better definition” to the products.
A MetLife representative took a more cautious position, however. “We too have a lot of questions about these products, and we do welcome a careful look at them before regulatory approval is provided,” he said.
As for regulatory concerns about the product filings, Kelly Ireland, a senior counsel at the American Council of Life Insurers, Washington, D.C., suggested that the filings haven’t been so much deceptive as they are subject to some confusion.
“I think a lot of it can be moved along with a great deal of education,” she said.
Ireland also said she thinks it’s important to have the companies and interested parties at the table when regulators are trying to sort things out concerning the annuities.
During the phone conference, the regulators decided to revisit contingent annuity issues once again at NAIC’s fall national meeting, Nov. 3-6, at National Harbor, Md. At that time, the committee may also decide to form a working group to look into the potential regulatory issues, said Committee Chairman Adam Hamm, the insurance commissioner for North Dakota.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.
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