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  • NAIC to Scrutinize Contingent Annuities

    November 8, 2011 by Elizabeth Festa

    MetLife just says No to contingent
    annuities

    The
    NAIC is forming a working group to study the new market of contingent annuities
    and similarly designed products from an actuarial and policy standpoint, as
    various parties in the industry diverge on how the product should be classified
    and if, indeed, they should be sold under existing statute or model law.

    At the
    NAIC fall national meeting outside of Washington this week, regulators heard
    the American Academy of Actuaries and Prudential Financial argue that
    contingent annuities should be treated as annuities, while MetLife and a key
    actuary from the NAIC life actuarial workforce revealed deep reservations.

    The
    issue “cries out for a deeper look,” said Tom Considine, the New Jersey
    Insurance Commissioner who will be heading the subgroup, apparently of the Life
    Insurance and Annuities Committee.

    “We
    believe [the NAIC] should classify a contingent annuity as an annuity and not
    as a financial risk product,” said Cande Olsen, representing the AAA, before
    the Life Insurance Committee of the NAIC on Nov. 4.

    Her
    AAA contingent annuities working group basically compared key risks and
    benefits of a contingent annuity to those of the widely accepted variable
    annuities with guaranteed living withdrawal benefits.

    A
    contingent annuity is essentially a stand-alone guaranteed living withdrawal
    benefit, Olsen presented a letter written the week before with actuarial
    analysis backing the association’s claim. The working group also looked at tax
    treatment, Securities and Exchange Commission (SEC) treatment, nonforfeiture treatment,
    and state guaranty fund coverage to reach its conclusions.

    “The
    product had a material longevity component, and the life industry has the
    experience to manage these risks,” Olsen said.

    Despite this, MetLife will not be selling the product,
    according to Eric DuPont of the New York-domiciled company. In fact, MetLife
    does not think the product is even an annuity, and that it could lead to
    reserve problems. And New York does not take lightly to reserve issues generated
    from a financial product.

    “Among
    MetLife’s concerns is that we believe it is very difficult to measure and
    manage the risk associated with the guaranty on a contingent annuity.
    Therefore, it is difficult to determine adequate reserving needed to support
    the product,” Dupont stated.

    Dupont
    spoke before the NAIC and also provided a statement to reflect the company’s
    opinion. “These difficulties contributed to MetLife’s decision not to offer
    contingent annuities,” he said.

    Moreover,
    DuPont noted that the then- New York Insurance Department (now the combined
    Department of Financial Services) asserted in 2009 that contingent annuities
    are financial guaranty insurance under New York law.

    The
    New York law the Department referenced, MetLife said, follows the NAIC’s
    Financial Guaranty Insurance Model Law. That October 2008 contains a lengthy
    definition of financial guarantee insurance.

    DuPont
    beleives the matter should not only be taken up by the Life Committee but by
    with representation from the Financial Condition Committee.

    Six
    other states also maintain laws or regulations that follow the sections of the
    NAIC model relevant to New York’s opinion: Alaska; California; Connecticut;
    Florida; Iowa; and Maryland.

    However,
    the AAA took another tack, stating that the “basic regulatory framework in
    place for other products can be applied to contingent annuities with little or
    no modification.”

    The
    AAA also stressed the public policy benefits of contingent annuities to the
    NAIC, noting that “contingent annuities can be a beneficial annuity product for
    many consumers.”

    “We
    performed an analysis of the risks covered by the contingent annuity that demonstrates
    that the product provides material protection against longevity risk in
    addition to market risk,” the AAA letter stated.

    The
    AAA conceded that although there does not appear to be definitive guidance in
    all state insurance laws limiting the sale of life contingent products to life
    insurance companies, the contingent annuities working group knows of no state
    that would permit a property/casualty insurance company to offer for sale an
    insurance product with a material life contingent component.

    Anticipating
    MetLife’s and New York’ s stance, perhaps, the letter argued that a contingent
    annuity is very different than financial guaranty insurance because it does not
    insure the covered assets, protect against loss of the covered assets, or
    promise that a specific amount of covered assets will be maintained upon
    occurrence of a market decline. Instead, the contingent annuity provides
    insurance protection with respect to a specified life, guaranteeing lifetime
    income payments to the purchaser following the depletion of the covered assets
    while that purchaser is still living irrespective of the performance of the
    covered assets.

    The
    AAA encouraged the NAIC and other state insurance regulators to seek uniformity
    in state laws to facilitate consistent review, issuance and regulation of these
    products in order to provide consumers with another product alternative that
    can protect against longevity risk through guaranteed lifetime income coverage.

    While
    Prudential Financial, in New Jersey, publicly supported the AAA working group’s
    analysis, noting the product does not “indemnify loss,” Mark Birdsall – the
    Kansas Insurance Department actuary active on the life actuarial task force of
    the NAIC – expressed reservations.

    “We
    reviewed a product similar to what is being described here – we determined this
    product structure doe not fit the current regulatory structure,” while it may
    be in the public interest, Birdsall said.

    For
    more, consider AAA’s analysis on the similarities and differences between
    contingent annuities and variable annuities with guaranteed living withdrawal
    benefits as detailed in the Oct. 28 letter addressed to Adam Hamm, chair of the
    Life Insurance Committee and North Dakota’s Insurance Commissioner:

    There
    are differences
    between contingent annuities and variable annuities with guaranteed living
    withdrawal benefits:

    1. A
    contingent annuity applies a benefit to assets not directly managed by the
    insurer, where variable annuities are directly maintained and managed by the
    insurer.

    2.
    Contingent annuities are stand-alone contracts, but the guaranteed living
    benefits provided with variable annuities are directly tied to the base
    contract.

    There
    are many similarities between
    contingent annuities and variable annuities with guaranteed living benefits:

    1.
    Consumer protection against longevity risks by providing a guaranteed lifetime
    income stream

    2.
    Consumer protection against market risks

    3.
    Insurer ability to manage the basis risk, when the necessary contractual and

    operational
    controls between insurer and asset manager are in place

    4.
    Similar suitability and disclosure issues,

    5.
    Sophisticated risk management processes and comparable regulatory oversight is
    essential.

    Originally Posted at LifeHealthPro by Elizabeth Festa.

    Categories: Industry Articles
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