Filed Under:Annuities, Suitability

NAIC to Scrutinize Contingent Annuities

MetLife just says No to contingent annuities
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 who is 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 does 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.

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