NAIC Hears Different Stories On What’s Best For Annuity Consumers

San Francisco

State insurance commissioners heard very different views on what is best for annuity consumers who buy guarantee riders.

During a hearing of the Interstate Insurance Product Regulation Commission, Washington, state legislators, consumer advocates and the life settlement industry made the case for a consumer’s right to sell guaranteed living benefit and minimum death benefit riders sold with individual deferred variable and non-variable annuities.

Life insurers argued that what is in the consumer’s best interest is availability of product. That availability will go away if life insurers are forced to factor in the ability to sell these guarantees to institutional investors into pricing assumptions, they warned.

The IIPRC hearing was held on December 4 during the winter meeting of the Kansas City, Mo.-based National Association of Insurance Commissioners here. The issue has been brewing for several months as Brian Staples of Right LLC, Versailles, Ky., representing the Life Insurance Settlement Association, Orlando, Fla., argued that to deny a consumer the right to sell what they have purchased is to take away a valuable asset. State insurance legislators at the National Conference of Insurance Legislators, Troy, N.Y., agreed following testimony at its recent annual meeting a little over two weeks ago.

During the hearing, state Rep. Bob Damron, D-Nicholasville, Ky., and the new NCOIL president, said that these guarantees are being used to market annuity products and that to take away the right to sell what seniors have purchased is “just wrong. For anyone to say that this is not anti-consumer makes me think that they have not checked the definition.” And, he continued, even if some states have already approved product filings with termination provisions, it is still an anti-consumer measure.

State Rep. Brian Kennedy, D-Hopkinton, R.I., noted that the bottom line should be to ensure the best interest of consumers, not what is in the best interest of insurers.

Ryan Wilson, representing AARP, Washington, echoed those comments and Brendan Bridgeland of the Center for Insurance Research, Cambridge, Mass., said that he had not seen any data or studies to support insurers’ assumption that guarantees would be sold or institutional investors would buy them.

Life insurers disagreed. Maureen Adolph, representing Prudential Financial, Newark, N.J., said that there is a tremendous need for steady income in retirement. While annuities can fill the gap, she said that Prudential has learned that very few contract holders are willing to give up control over their money and annuitize products. Annuity guarantees are a “21st Century Solution,” she continued. In Prudential’s case, contract holders can opt to receive up to 6% of the contract value at the time of retirement without annuitizing their contract. This option has proved “extremely popular,” she noted, with 90% of buyers choosing these lifetime guarantees. If these guarantees are subject to assignment, then price increases will follow, hurting consumers, according to Adolph.

Dave Sandberg, representing Allianz Life Ins. Co. of America, Minneapolis, said that consumers who purchase guarantees are not really buying an asset in as traditionally defined, but rather “the promise of lifetime income.” The pricing issue is a straightforward financial issue, he continued. The insurer does not count on the contract holder to sell those benefits. If policyholders use the features to provide income, obligations are spread out over time, he said. But, if these features are sold to institutional investors, then there is a “huge concentration exposure that will require additional capital and reserves,” Sandberg explained.

Elaine Leighton, representing John Hancock Financial Services in its Buffalo, N.Y. office, said that she would support prominent disclosures on contracts noting the termination provisions.

The discussion raised the issue that the proposed IIPRC standards allow companies to sell these features without termination rights. Consequently, it allows the market the greatest flexibility by letting companies choose how to sell these features, the discussion among regulators pointed out.

But Staples argued that if 90% of consumers are opting for these guarantees, then what happens if those consumers decide at some point that “the product is not meeting their needs or expectations?” Their one option would be an option to sell, he said.

Ohio Insurance Director Mary Jo Hudson, who is also IIPRC chair, said that the comments will help the IIPRC in determining whether to fully adopt these standards or to continue to work on them. She urged anyone who still wanted to weigh in on the standards to do so before the end of the comment period on December 28. If the standards continue are ultimately adopted in their current form, they probably would be in place in April 2010.