It’s Time to Remove the Gag Order on Guaranty Fund Disclosure
July 19, 2013 by Kim O'Brien
Section 19 of the NAIC LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION MODEL ACT 520 prohibits the “advertisement of the Insurance Guaranty Association in insurance sales.” The Act specifically states that:
“No person, including an insurer, agent or affiliate of an insurer shall make, publish, disseminate, circulate or place before the public, or cause directly or indirectly, to be made, published, disseminated, circulated or placed before the public, in any newspaper, magazine or other publication, or in the form of a notice, circular, pamphlet, letter or poster, or over any radio station or television station, or in any other way, any advertisement, announcement or statement, written or oral, which uses the existence of the Insurance Guaranty Association of this State for the purpose of sales, solicitation or inducement to purchase any form of insurance covered by the [State] Life and Health Insurance Guaranty Association Act.”
What this means is that insurance agents are prohibited from disclosing to a potential purchaser of an insurance product — including annuities — the fact that state Guaranty Associations, which exist in all 50 states, provide some financial protection to policyholders and annuity owners in the event that their insurance carrier experiences serious financial problems. Most states protect annuity holders for 100% of their losses up to $100,000; approximately 30 states offer a guaranty in excess of that amount.
And yet, Federal Deposit Insurance Corporation (FDIC) stickers in every bank in America promise that every “depositor is insured to at least $250,000.” This is a promise that’s “backed by the full faith and credit of the United States government.” Every bank customer is made aware by the sticker pasted on the door as they enter their bank that they should limit their savings and assets in any one bank to $250,000. If by some chance the bank customer missed the sticker, there are millions of bank product advertisements in all forms that prominently display “FDIC Insured,” and it would be only the most unobservant and obtuse bank customer who didn’t understand that it would be prudent to place savings above $250,000 somewhere else.
Meanwhile, owners of annuities have no such conspicuous reminder for their protection. You aren’t made aware when you move your retirement nest egg into an annuity that you, too, might be wise to diversify your savings between more than one annuity contract or annuity carrier. You may find out after the fact, but the law is clear; you may not be informed by your annuity professional or your chosen insurance company BEFORE purchase. Compounding this anti-consumer policy is the fact that if you learn about your guaranty fund protection limits after your free-look period, you could incur charges if you try to diversify and protect your retirement. How is this helpful to annuity consumers? How is this helpful to Americans using annuities to save for retirement?
How Protected Are You Really?
Dare we ask how “protected” and “insured” you are by the FDIC? A recent article by Alex J. Pollock, a resident fellow at the American Enterprise and CEO of the Federal Home Loan Bank of Chicago from 1991-2004, sheds some light on what this “promise” actually amounts to and what its “full faith backing” really means. Mr. Pollock walks us through an interesting history:
1980 The Savings and Loan crisis began resulting in hundreds of S&Ls throughout the United States going insolvent.
1982 Congress passes a joint resolution stating that it was the “sense of Congress” that insured deposits were backed by the credit of the United States.
1987 Congress passes the Competitive Equality Banking Act of 1987 stating, “It is the sense of the Congress that it should reaffirm that deposits up to the statutorily prescribed amount in federally insured depository institutions are backed by the full faith and credit of the United States.”
1989 The Federal Savings and Loan Insurance Corporation—the U.S. government’s deposit insurance fund for the savings and loan industry became insolvent and required a taxpayer bailout. Congress included the requirement that every savings bank “display at each place of business a sign” saying that “insured deposits are backed by the full faith and credit of the United States Government.”
2005 Housing bubble caused Congress to amend the Federal Deposit Insurance Act to include “all banks.”
Words Matter
At NAFA, we stand by the axiom “WORDS MATTER,” and the words mentioned here are particularly interesting. Congress chose the word “backed” not “contractually guaranteeing.” Without those two critical words, it is hard to determine where the real insurance is with the FDIC. Those of us who have made our careers in the industry understand and know the term “insured” to mean a contractual promise between an insurance company and the policy owner guarantees protection of assets from peril by providing stated benefits following a loss. Life insurance promises protection from a premature death, home insurance promises protection from a fire or tornado, all annuities promise protection from living too long, and fixed annuities additionally promise protection from investment risk.
Yet, bank deposits are “backed by the full faith and credit” of the US government. A backing that isn’t as reassuring as it once was, given the level of debt we hold and today’s economic realities with our government’s other promises of Social Security, Medicare, etc.; not to mention what we’ve seen happen to other nations such as Cyprus, Greece and Ireland. Mr. Pollock tells us that around the world there have been more than 250 defaults on government debt since 1800, an “average of about one sovereign default per year.”
Consumer Protections in Our Industry
Meanwhile, back to the insurance industry consumer protections: a recent report at the NAIC Spring Conference last April to the ERISA Retirement Income Working Group by Peter Gallanis, President of the National Organization of Life & Health Insurance Guaranty Associations (NOLHGA), informed us that NOLHGA’s member guaranty associations hold over $10 billion in annual assessment capacity with a fraction of that amount reported as assessments called. Even with these high levels of capacity, only 10 insolvencies involving NOLHGA occurred between 2008 and 2012 a time typically referred to by the media as the “worst financial crisis since the Great Depression.” Jack Marrion, NAFA’s Director of Research and President of Advantage Compendium, who tracks bank failures and insurance company insolvency, reports that none of those insolvencies involved annuity carriers. During that same period, 465 banks failed.
NAFA is working with members of the NAIC to put some disclosures in place to inform annuity purchasers and those considering the purchase of an annuity of the secondary insurance guarantee of the State Guaranty Fund. We have been told by reliable individuals informed about the workings of the NAIC that its members do have interest in putting a Guaranty Fund disclosure in place.
In fact, when working on the new NAIC Buyer’s Guide, a mention and explanation of the Fund and its coverage limits was included and was later removed. The NAIC reliable source tells us that a few insurance companies with strong ratings were concerned that the disclosure may be misused by insurance companies (or their agents) with less-than-strong ratings to lure consumers into companies with low ratings. Those of us old enough to remember know that an A+ rating didn’t protect customers when their insurance company went insolvent in the 90s. NAFA argues that the new NAIC Buyer’s Guide can address both the “does a good rating protect you” and “using the Fund to create rating complacency” concerns. As our members know, NAFA worked hard with industry and fellow trade partners to come up with all of the improved language in the NEW NAIC Buyer’s Guide (due out this fall) including the following:
“Insurance companies sell annuities. You want to buy from an insurance company that is financially sound. There are various ways you can research an insurance company’s financial strength. You can visit the insurance company’s website or ask your annuity salesperson for more information. You also can review an insurance company’s rating from an independent rating agency. Four main firms currently rate insurance companies. They are A.M. Best Company, Standard and Poor’s Corporation, Moody’s Investors Service, and Fitch Ratings. Your insurance department may have more information about insurance companies. An easy way to find contact information for your insurance department is to visit www.NAIC.org and click on “States and Jurisdictions Map.”
Let’s Remove the Gag Order
How many bank customers of the 465 failures were made aware of the bank’s poor standing? Did they know how to find out how strong their bank was? NAFA believes it would be easy to address any concerns with disclosing the Guaranty Fund by simply adding a paragraph explaining the Guaranty Fund protection and amending the Guide or including a separate disclosure document, including both paragraphs to be given at or before the application for insurance (the timing requirement for the Buyer’s Guide).
When our competitors argue that our insurance guarantees are “only as strong as the insurance company making them” they’re right, but they’re leaving out two critical facts. One, the strength of the insurance industry has a long and proven track record and, two, should the worst happen, consumers have a secondary protection from their State Guaranty Fund. Today, our insurance companies and annuity professionals are limited to correcting only the first omission.
NAFA actively advocates the removal of the gag order on Guaranty Fund disclosure and allow responsible information that helps the customer understand how to research the strength of the company they’re considering (not just rely on a single rating), and the important protection information on how much savings they should place with any one contract or carrier.
Until then, the NAIC Model makes it clear that the law doesn’t apply to “any other entity which doesn’t sell or solicit insurance.” Therefore, NAFA remains committed to promote the information at www.annuityed.org through its education partner SAFE, the Society for Annuity Facts and Education, an organization the NAFA initially formed in 2011 as a separate 501c3 consumer education non-profit. Also, look at NAFA’s consumer website, www.fixedannuityfacts.org, for a state-by-state listing of the Guaranty Fund limits and accompanying explanation on the protections afforded by the Guaranty Fund. Check out our Consumer Tips article on Guaranty Fund Protection at nafa.com and the aforementioned websites.
