National Harbor, Md.— The development of recommendations for the treatment of contingent deferred annuities (CDAs) will continue into the new year with possible conclusions by the time of the spring meeting in Houston, even as federal interest in the product has been piqued.
Currently, the U.S. Government Accounting Office (GAO) is working on a report on the product, and federal agency representatives are monitoring the product, as part of their statutory power to do so, according to reports from the NAIC National Meeting in Washington.
The GAO report, whose Congressional sponsor has not yet been disclosed, is in draft form and is due out in a couple of weeks, according to some NAIC members, and so far does not express any alarm over the product, which it has been looking at along with other products with guaranteed benefits and the capacity of state guaranty funds to handle them, some say.
Concern for the new product is most publicly voiced by Birny Birnbaum, a consumer advocate and economist, of the Center for Economic Justice (CEJ).
CEJ has concerns about a product it says can create systemic risk, causing insurers to run ashore without enough reserves and suffer the same fate as long term care insurance where promised benefits are slashed or fees increased dramatically.
A CDA is a product that “seems certain to produce either massive profits or catastrophic losses for insurers" according to Birnbaum.
Birnbaum has contended that based on analysis by the CDA subgroup earlier, a "rational investor" purchasing a CDA would invest in the “riskiest portfolio permitted.”
Birnbaum asked the working group, headed by Commissioner Ted Nickel of Wisconsin, to analyze the suitability of the product for consumers.
Indeed, with regard to longevity risk, it is real only if buyer behavior “is efficient and moves into a higher risk/reward portfolio,” but “there is no meaningful longevity protection if the covered portfolio is too conservative, or if the policyholder behavior is sufficiently inefficient,” one actuary who headed a former incarnation of the subgroup on the subject has said.
The developers of the product once compared the protection to the same thing that happens in the property casualty world where protection is purchased and the payout protection is great only if an event occurs, such as a fire with homeowners insurance.
“The likelihood of a consumer realizing a net benefit from a CDA is very small if the covered assets are more conservatively invested. The likelihood of realizing a net benefit from the CDA increases with riskier investments of the covered assets. Any suitability requirements imposed on insurers and producers selling CDAs must incorporate this important characteristic of CDAs,” Birnbaum stated in a letter to Nickel in October.
Birnbaum has also expressed concern on the issue to members of the Federal Insurance Office (FIO) and others in federal regulatory positions on the risks involved in insurers hedging techniques and how they might play out with CDAs. He raised the question that if hundreds of thousands or millions of retirees suddenly are eligible for CDA benefits because of precipitous declines in the stock market and other investments, what position will the counter parties be in to pay the losing end of the hedge, and pointed to the situation with credit default swaps.
Birnbaum is also concerned about the impact of these products on the U.S. solvency regime.
“We ask that the working group’s paper include an analysis of systemic risk posed by CDAs and the implications of any systemic risk on solvency oversight and the capacity of the state-based guaranty fund system to handle insolvencies associated with CDAs,” he stated.
Significantly, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) Coverage Claims Committee, made up of guaranty association (GA) lawyers, industry representatives and its legal counsel, Faegre Baker Daniels, concluded that under the NAIC GA Model ACT and subject to significant provisions, the form of CDAs it reviewed “appear to be eligible for coverage as annuity certificates under a group annuity contract.” NOLHGA delivered its conclusions to the CDA Working Group here in at the NAIC National Meeting Nov. 29.
A vocal section of the life insurance industry is lobbying hard for the product, if not yet underwriting it, although Great West Life & Annuity has a product out—they want CDAs to be subject to the same regulations as variable annuities for the purposes of market regulation and consumer protection. If variable annuity regulation is found not to be appropriate, then they want fixed annuity regulations.
The Insured Retirement Institute (IRI) has a preliminary conclusion that would support a finding that CDAs should be and are currently subject to the identified regulations the same as variable annuities within the framework of market conduct and consumer protections.
The American Academy of Actuaries has said that the regulatory framework already in place for Guaranteed Lifetime Withdrawal Benefits (GWLB) is appropriate for CDAs.
Prudential Financial is very keen in the product and has done much of the development, and thinks it can work in treatment and as both a variable and a fixed product. MetLife was opposed and raised a ruckus about solvency concerns and is now neutral after Prudential better described the product to them.
The New York Department of Financial Services is still governed by a 2009 opinion that says CDAs are financial guaranty products. There is another state besides New York which considers the product a financial guarantee product, New Jersey actuary Felix Schirripa once suggested on the call, in response to a Great-West Life & Annuity Insurance Co. official calling the New York regulatory opinion an "outlier."
The draft definition of a CDA by the working group is an annuity contract that establishes an insurer's obligation to make periodic payments for the annuitant's lifetime at the time designated investments, which are not owned or held by the insurer, are depleted to a contractually defined amount due to contractually permitted withdrawals, market performance, fees and/or other expenses.