“Complex” products risky to insurers, too

Offers state guaranty fund caveats for CDAs but positions products as helpful in retirement to older Americans

Risks abound—even for insurers—in not fully understanding annuity products. Photo credit: FreeDigitalPhotos.net Risks abound—even for insurers—in not fully understanding annuity products. Photo credit: FreeDigitalPhotos.net

The General Accounting Office (GAO) agrees new annuity designs with guarantees can be helpful to helping consumers looking for a steady stream of income but used a variety of input from state and federal regulators as well as insurers to conclude that consumers should proceed with caution, or the help of a professional, for now, when selecting these products.

And, the report said the products are not without risk for both consumers and the industry.

"These products can also create risks for insurers which, if not addressed, could ultimately affect insurers’ ability to provide promised benefits to consumers," the report concluded after input from several insurers and regulators on the risks. 

The GAO referenced others when it suggested it is important for consumers to obtain professional financial advice before purchasing these products and making key decisions. 

However, the GAO was not heavy-handed in its report in any way. For example, it stated that consumers who purchase variable annuities with guaranteed lifetime withdrawal benefits (GLWB) and contingent deferred annuity (CDAs) can face risks similar to those they may face with the purchase of other financial products.

The GAO-listed risks are obvious to those familiar with variable annuities, and include purchasing an unsuitable product, paying too much, making withdrawal decisions that decrease benefits, and having an insurer become insolvent before benefits are received.

The GAO did state that until regulatory issues are resolved on whether state guaranty funds laws allow for CDA coverage, consumers may not be fully protected, concluded a recent GAO report on annuities with guaranteed lifetime withdrawals and sister products, CDAs.

Happily for the industry crafting these products, the GAO identified CDAs and VA/GLWBs as products that could well provide unique benefits to consumers in building their retirement security.

Consumers can benefit from these products by having a steady stream of income regardless of how their investment assets perform or how long they live, while at the same time maintaining access to their assets for unexpected or other expenses, the GAO report said.  

It did offer a small primer on the controversial CDAs, culled from input from interested parties, including those who represent state guaranty funds.

One benefit specific to CDAs is that the guarantee of lifetime withdrawals can, in certain cases, be applied to existing investment assets. That is, consumers who have existing investment assets may be able to purchase a CDA to cover those assets, if an insurer agrees to cover those assets under a CDA, the GAO report stated.

However, according to officials from the National Organization for Life and Health Guaranty Associations (NOLHGA), the GAO found out that while promises made under GLWBs, which are distinct from the investment portion of a variable annuity, are generally covered by state guaranty funds, such certainty does not exist with respect to CDAs. “As a result, a risk exists that if an insurer who sold a CDA became insolvent, consumers owning those CDAs might not collect any promised benefits,” the report warned.

 The GAO said it conducted the research report to address the challenges faced by older Americans as they retire, including  health care costs, inflation and the risk of outliving their assets. It agreed that lifetime income products can help retirees have income throughout their retirement.

The American Council of Life Insurers )ACLI) spokesman Whit Cornman said that, as stated in the GAO report, "variable annuities with guaranteed living withdrawal benefits and contingent deferred annuities offer consumers important guarantees in retirement. These guarantees will play an increasingly important role as more and more Americans seek to secure their retirement incomes."ACLI agrees  with the GAO that consumers should seek professional advice and carefully choose an annuity that meets their individual needs, he said.

 The Insured Retirement Institute (IRI) also focused on the population's retirement income needs as overriding virtue.

“In an era when consumers will responsible for securing their own financial futures, it is vitally important that consumers have access to a wide array of sound retirement income solutions,” said Cathy Weatherford, IRI president and CEO. “As American’s struggle to manage the risks associated with retirement planning and uncertainty stemming from volatile markets and a sluggish economy, these lifetime income products offer consumers the certainty they seek during unsettling times."

Weatherford said, regarding the questions about the uncertain regulatory environment, that IRI believes that current regulatory oversight at both the federal and state levels is robust and effective, with enough safeguards in place.  

Of interest, the GAO report also discussed solvency risks to insurers that can arise when investment returns, interest rates, consumer longevity and consumer behavior are different from what they expected.

While a number of insurers and NAIC officials said that VA/GLWBs and CDAs do not pose undue risk to insurers, at least one major insurer has decided not to sell CDAs because of the potential risk involved, and another insurer said it does not sell VA/GLWBs because they do not fit with the company’s risk profile, the GAO report stated. MetLife last year took a stance against the sale of CDAs. Prudential Financial is the major developer of CDAs, which have had—and are still undergoing—their day in court at the NAIC and are now gaining wider regulatory acceptance, if not by consumer representatives like economist Birny Birnbaum and, when last checked, New York state law.

Birnbaum said after a light look at hte report that it seems to be fairly noncomittal and returns to the theme of state regulatory variation.

The title of the report is: Annuities with Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but Regulation Varies across States.

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