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.
