Filed Under:Annuities, Variable

CDAs Under Scrutiny: What Happens if They Fail, Regulators Wonder

A product that shines, for some (AP)
A product that shines, for some (AP)

Contingent Deferred Annuities (CDAs) can present significant risks to insurance if they are unmanaged, the actuary overseeing the Contingent Deferred Annuity (CDA) Subgroup of the NAIC noted, recounting overarching messages he heard on a regulator-industry conference call Thursday, Jan. 26, to discuss the controversial products.

Although demand for the product continues to be emphasized by insurance groups, regulators and some interested parties kept returning to the issue of risk and whether the products would be covered if they failed by the state guaranty fund. 

The question was raised by an interested party on the conference call to discuss ongoing work and thoughts from interested parties on CDAs. The party said he was a novice at the issue but was worried about the specter of long term care insurance debacle where companies that only sold LTCI made promises they couldn’t keep, actuaries said everything would be fine in reports. In actuality, insurers found policyholders are much more likely to keep the policies in force than the actuaries had expected, and claims have been somewhat higher than expected. Metropolitan Life announced in November 2010 that it would no longer sell new long-term care insurance policies in either the individual or group markets after the end of 2010.

Whether or not the products are covered by guaranty funds will take years to resolve, Felix Schirripa, chief actuary with the New Jersey Department of Banking and Insurance said on the call.

Schirripa did say that the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), voluntary association made up of the life and health insurance guaranty associations of all 50 states, the District of Columbia, and Puerto Rico, is looking into CDA consideration. 

But the determination in the future shouldn’t stall the NAIC’s progress is trying to classify the product and determine its treatment, some agreed. 

However, Birny Birnbaum of the Center for Economic Justice said on the call that just because there is a demand in the marketplace, then that doesn’t mean it is appropriate, legal or reasonable to sell it as an annuity, echoing MetLife’s entrenched stance on the issue. 

MetLife, the largest insurer in both the American Council of Life Insurers and the Insured Retirement Institute associations, is the chief and only dissent in both trade associations holding firm to the position that the CDAs shouldn’t be sold an annuities and present great risks to insurers. See: http://www.lifehealthpro.com/2012/01/19/metlife-and-pru-square-off-over-contingent-deferre?page=2 

Birnbaum, a consumer advocate and economist, said that a CDA seems to him to be a derivative type of product which leverages the risk to insurers, and that it is really essential to find out how much product is already out in the marketplace, how much exposure insurers are facing and also if guaranty fund coverage is indeed available for them.

Prudential’s representative said on the call that the company would not want these products to create any concerns echoed by some, and that the company is a proponent of appropriate regulatory guidance and oversight as a way to reduce risk. 

We believe there are appropriate protections, in terms of managing the risks around externally held assets, Prudential’s representative said. 

He echoed the firm’s letter, which argues that “Prudential firmly believes that the risk can be managed through rigorous diligence on asset management programs prior to making the contingent annuity available...”

To be sure, there is some element of market risk that exists with respect to CDAs, Prudential stated, but kept noting the products cover longevity risk, the hallmark of an annuity product.  

“However, CDAs do not reimburse for market losses. Rather, market risk impacts the timing of when the payment source for the periodic benefit shifts to the insurance company. Indeed an individual can suffer no loss ever in the investment assets and still receive payments from the insurance company...With financial guaranty insurance, on the other hand, there is no longevity factor,” Prudential stated.

Because “CDAs provide guarantees similar in nature to the lifetime income guarantees which exist on variable annuities, we believe these products should be subject to the statutory reserve guidance provided by Actuarial Guideline XLIII (AG 43) and the statutory risk-based capital requirements of the RBC C3-Phase II framework,” Prudential wrote in a letter to Schirripa signed by Stephen Pelletier President, Prudential Annuities.  

For more on that, see:Prudential's letter, "Re: Comments to the NAIC Contingent Deferred Annuity (A) Subgroup"

“Further, AG 43 is clear in its guidance that only the revenues and expenses associated with the contract should be included in the projections used to determine the appropriate level of reserves and capital.”

But Schirripa was also concerned about fee drag, causing  a reduction in available funds. He said he thinks buyers need to know that,  the possibility of forfeiting lifetime income if they need access to the funds, and the possibility of meaningful longevity protection mostly when moved to a higher risk, higher reward portfolio. Retirees should be encouraged with these products to move out of low yield investments, the actuary said. He also delivered a 33-page actuarial report on a backtest methodology measuring longevity production to hypothetical buyers available on the NAIC’s website on the Contingent Deferred Annuity (A) Subgroup tab, along with position letters from the other interested parties.

Schirripa said he  sees the possibility of meaningful longevity protection if retirees moved to a higher risk, higher reward portfolio.

However, at the outset of the call, Schirripa made clear that  the group has a common goal, helping retirees and near retirees optimize their retirement savings--that is the goal, and that although there are tough questions, the NAIC subgroup has not prejudged CDAs

“We are all listening with open minds,” Schirripa said.

The opening statement was likely in response to much give and take, including that from the American Academy of Actuaries group studying the issue, which  bristled at the conflcit between its role, and the NAIC's perception otf its role, in work so far scrutinizing CDAs.

"At the January 19 meeting of the NAIC Contingent Annuity Subgroup, the Contingent Annuity Work Group (CAWG) of the American Academy of Actuaries presented a comparative analysis of the potential value of a typical contingent annuity and a self-directed investment arrangement (self- insurance) at your request," the AAA wrote to the Schirripa Jan. 26. 

"The discussion that ensued after the presentation left us with the impression that you believed our analysis was not focused on the issues that were initially requested. In addition, during the call, questions were raised on whether our original October 28 report appropriately addressed the legal ramifications of contingent annuities, and on whether the Academy had an unbiased focus on the issue."

"We acknowledge that there are legal issues surrounding contingent annuity products, but have never held the Academy as having any expertise on legal issues....

"In light of the NAIC legal counsel’s observation on our October 28 report that the report’s ‘legal analysis was lacking,’ we believe that it is important to remind you that the CAWG’s report did not include a legal analysis.....We respectfully suggest that in future cooperative efforts between the NAIC and the Academy that both parties utilize either meeting minutes or emails to document the approach and objectives at the beginning of the analysis," wrote Andy Ferris, Chairperson  of the AA's Contingent Annuity Work Group and Cande Olsen, Vice-President American Academy of Actuaries Life Practice Council.

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