State insurance regulators are continuing to wrestle with the contingent deferred annuity (CDA) product’s place in the world of retirement and annuity products. Some agree a name change is required, and have suggested the industry develop one. Most parties involved agree that an exemption to the standard nonforfeiture law (SNFLIDA) for individual deferred annuities should be enacted. Others think there should be a special interpretation.
Because many (possibly even a majority) of the CDAs fall within the scope of the SNFLIDA, and because the application of the law is arguably unclear, either an exemption from the law or special interpretation would be required, concluded the regulator who analyzed the product for the NAIC’s Contingent Deferred Annuity Working Group in a teleconference presentation Aug. 29.
Tomasz Serbinowski, an actuary with the Utah Insurance Department, told fellow regulators that certain products, like some group annuities, annuities in the payout phase and variable annuities, are exempt from the law but many CDAs would not fit any of the existing exemptions.
However, Serbinowski said it is unclear how to apply the law to CDAs.
The nonforfeiture law provisions vary depending whether a contract provides cash value benefits. However, CDAs do not provide any lump-sum settlements (nor any death benefits) and hence are not required to provide cash values.
There are two tests for the nonforfeiture law, a retrospective and prospective one, but there is confusion over defining some values like premiums, the discount rate and maturity value, according to Serbinowski’s analysis, which was generally supported by the working group.
Still, regulators have for months now tossed the concept of CDAs around and determined more clarity is needed on many fronts.
In February, CDAs were declared to be a hybrid product, by the CDA subgroup at the time. Industry support for the CDA as an annuity has been great, with the notable exception from MetLife, who challenged, with some state insurance officials, that CDAs are a financial guaranty product. New York and MetLife are said to have backed away from that stance.
Insurance departments could regulate the product as an “annuity” after thorough reviews/adjustments, especially modifications in reserve methodologies (AG 43), and the filing process for guaranteed lifetime withdrawal benefit features, according to the subgroup's discussion.
Mark Birdsall, chief actuary with the Kansas Insurance Department, told regulators more work needs to be done on reserving and risk-based capital (RBC) for this product and that the Life Actuarial Task Force (LATF) or the Life RBC working group could be the group to deal wit it. He said there needs to be significantly more analysis on the unique aspects of these products.
NAIC long-time consumer advocate Birny Birnbaum of the Center for Economic Justice reminded the group that they should look at products with similar features, as well.
One regulator from Tennessee suggested that CDAs may be considered synthetic deferred annuities since the company doesn’t own the asset and raised the possibility of a separate chassis for them.
The annuities are not risky but could become very risky if the underlying assets are risky, pointed out Michael Humphreys, from Tennessee’s department of commerce and insurance.
One regulator from Missouri who agreed with the analysis of Serbinowski, said it was unfortunate that the initial moniker of these products were CDAs and that there should be an attempt to categorize them once and for all and not throw them into a basket where they don’t belong.
Jim Mumford, First Deputy Insurance Commissioner, Iowa Insurance Division, said, "that it appears to me that the standard nonforfeiture law should not apply to CDAs at all. The carrier is not charging anything and the customer is not looking at the company to provide wealth, they are looking at the fund." He agreed there should be an exception to the SNFLIDA for CDAs or that some type of interpretation be given or some kind of rule or regulation be put forth about what could be put in the fund.
Mumford asked the industry to come up with a definition for CDAs would fall sooner than later, a one or two line definition -- for future treatment in order to help people understand the definition of these products -- and also a new name. Regulators and the industry toyed with the idea on the call but made no commitments.
The “deferred” aspect of the name "was throwing us off -- made it seem like it would fall under nonforfeiture law," one regulator said on the call.
Lee Covington, general counsel at the Insured Retirement Institute (IRI) in Washington, tried to assure regulators that although it is possible for the CDA benefit to be terminated by the plan sponsor, it would have to be in the best interest of the plan or the sponsor would face all sorts of litigation under its fiduciary responsibility.
With regard to the annuitant not getting the benefit of the CDA, he said it is a very remote possibility, “we just don’t see that happening unless the employers profile turns to a very young employee mix and they may not get the benefit of the CDA.”
“In reality, we believe that plan sponsors would provide some type of continuing benefit, so they would not lose that” -- but to foreclose that opportunity to act in obligation to the plan’s fiduciary responsibility would violate ERISA, Covington warned.
The CDA working group is also keen to review marketing materials from carriers for the product, particularly to individuals.
Keith Mancini of Colorado-based CDA player Great Western Life & Annuity Insurance Co. presented the group with a Group Fixed Deferred Annuity Contract in a discussion of market materials and disclosures, oversight of which Mumford questioned in terms of regulatory supervision of documents. The product is not registered with the Securities and Exchange Commission but has been submitted to the agency.
“I am trying to be clearer on who reviews what as we have so many regulators involved,” Iowa’s Mumford said.
There will be a regulators-only call late next week on CDAs.