Insurance Compact Commission Hears Annuity Rider Debate; Advances Long-Term Care Standards

The Interstate Insurance Product Regulation Commission, Washington, advanced standards for long-term care product filings and decided to have actuaries review a proposal that prohibits a consumer’s ability to sell annuity guarantee riders to institutional investors.

Three proposed standards creating product filing requirements for guaranteed living benefits for individual deferred non-variable annuities; individual deferred variable annuities; and guaranteed minimum death benefits for individual deferred annuities are the source of debate as the Commission considers possible adoption. The Life Insurance Settlement Association (LISA), Orlando, Fla., and Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, have criticized the proposal, asserting that it will restrict a consumer’s right to the use of property that has been purchased from a life insurance company.

Life insurers represented by the IIPRC’s industry panel, have countered, asserting that the behavior of consumers and industry differ and such a requirement would increase costs to consumers and discriminate in favor of consumers that are healthier and who have bigger contracts.

During the IIPRC Management Committee’s conference call today, chair Mary Jo Hudson, Ohio insurance director, moved to have the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo., review the issue, particularly cost and pricing considerations. The committee approved the proposal.

The decision was made after comments were received. Barbara Lautzenheiser, spoke for the American Academy of Actuaries, Washington. Lautzenheiser explained that permitting individuals to purchase GLB riders will increase the initial price of the feature even if contract holder later has the ability to sell their contract at a price exceeding the cash surrender value. The reason, she explains, is that individuals are more likely to use the benefit to guarantee income while institutional investors are more likely to cause concentration risk if they exercise contract rights for a block of contracts at the same time.

Lautzenheiser added that the increased upfront costs benefit certain consumers, namely those who intend to sell the rider, those who are likely to live longer and consequently are able to sell their rider if they choose; and those with larger annuities who would create more attractive buying opportunities for institutional investors.

Lautzenheiser offered rough estimates based on a GLB product for guaranteed minimum withdrawal benefits that suggest that if a contract owner chose a 50/50 split between stocks and bonds and the institutional preference is a 70/30 split, the extra exposure would increase the cost to the insurer by approximately 35%.
And, she added, these rough estimates also indicate that if institutional investors purchased all of a carrier’s GLB annuities that were 25% ‘in the money’ that the cost of the feature would increase by approximately 50%.

Maureen Adolph, representing Prudential, Newark, N.J., said that consumers who were dissatisfied with their contract’s performance would not be restricted from doing with the contract what they deemed appropriate. Rather, she continued, the restriction would be on the rider. The point of the rider, according to Adolph, is to guarantee that the performance is reached.

Bruce Ramje, a Nebraska regulator, raised concern that there is not a regulatory framework available to prevent these transactions being used to create stranger-originated life insurance (STOLI) transactions.

Brian Staples of RIGHT, LLC, Versailles, Ky., representing LISA, responded by saying that the rider is what often gives a contract its value both to the carrier who markets the feature and the buyer of the annuity.

The Management Committee also advanced long-term care standards for product filing, approving standards for forms, rate filings and advertisements. The IIPRC notes that consideration of these standards began in November 2008 and since that time 54 meetings have been held to review these proposals.

Bonnie Burns of California Health Advocates, Scotch Valley, Calif., voiced concern that the standards incorporate the highest in the country. And that the requirement that a contract holder meet not be able to perform three activities of daily living rather than two ADLS, would restrict valuable home benefits.

She also expressed concern that allowing the IIPRC to approve rate increases would in effect be allowing it to act as a regulator.

The Management Committee’s Hudson said that there will be a public comment period during the spring NAIC meeting in Denver in March and there will also be a period of public comment. Wisconsin Insurance Commissioner Sean Dilweg made a motion to adopt the report which the management committee did in an 11-0 vote with 1 abstention. Missouri’s abstention was more procedural since its representative did not have the proxy authority to vote the issue.