Annuity Guarantee Rider Match May Be Near Final Volley

An annuity issue that has been bounced back and forth among regulators pitting arguments of property rights against product availability received another volley to a committee that may finally bring the match to an end.

On February 18, the Product Standards Committee of the Interstate Insurance Product Regulation Commission, Washington, voted unanimously to advance a proposal that would allow riders that offered guarantees to be terminated if that rider is sold by the policyholder to an investor. A new disclosure provision is included as part of the proposal, an effort to inform potential buyers of the rider of the termination provision.

The IIPRC was formed to develop uniform product standards for life insurance products that could be implemented nationally. It was developed and is affiliated with the National Association of Insurance Commissioners, Kansas City, Mo.

The issue has been developing since last summer with life insurers maintaining that the guarantee riders were created strictly to provide guaranteed income to individual consumers. Institutional investors, the industry panel argued, would use the product in more sophisticated ways that the riders were not meant for. If that institutional use was to come to pass, availability of these riders would dry up and those that were still available would become very costly because the assumptions that are the underpinning of these products would be rendered incorrect.

The counter argument was that when an individual purchases a guarantee rider with a variable annuity, that individual should be able to use what they have purchased in a way that he or she sees fit. The argument that insurers did not think that consumers could use riders to their full capacity like institutional investors did, was not giving consumers enough credit, according to those opposing the product standards.

The issue over the proposed standards, guaranteed living benefits for individual deferred non-variable annuities, GLBs for individual deferred variable annuities and guaranteed minimum death benefits for individual deferred variable annuities, was developed by the Product Standards Committee, sent up to its IIPRC parent the Management Committee, sent back down over criticism that it was anti-consumer and a pressing public policy issue that needed further examination including actuarial input, and now will be sent back up again for a possible vote either next week or at the spring NAIC meeting on March 25.

Prior to the 10-0 vote, advocates for the right of an owner to use something purchased in a way the owner saw fit, made a final case before the committee. Brian Staples of RIGHT LLC, Versailles, Ky., representing the Life Insurance Settlement Association, Orlando, Fla., argued that disclosure as proposed by the life insurance industry panel, was not the answer in every situation. An option is still needed for a contract owner to divest the rider if it is not performing well or the owner needs to raise funds.

In a Feb. 5 letter, Staples also noted that STOLI cannot occur without the actions of a producer and that efforts to curb the practice needs to start with better producer training and oversight by insurers. He also noted suitability issues over how these annuities are being sold to seniors.

A February 17 memo from the Industry Advisory Committee to the IIPRC’s Product Standards Committee states that the disclosure statement it had previously offered needs to be “strengthened.” It offered the following:

“The purpose of the guaranteed living benefit provided under this annuity contract is to provide retirement security through a stream of monthly income payments to the owner. The guaranteed living benefit will terminate upon assignment or a change in ownership of the contract unless the new assignee or owner meets the qualifications specified in the Termination provision of the guaranteed living benefit.”

During the discussion, at the request of the product standards committee, the words “retirement security” were removed in order to emphasize regular cash streams.
The IAC memo also noted that there is now a secondary market for annuities, citing a February 16 Wall Street Journal article “Investors Recruit Terminally Ill to Outwit Insurers on Annuities.”

IAC representatives include Prudential, Newark, N.J.; the National Association of Insurance and Financial Advisors, Falls Church, Va.; AEGON, the Hague in the Netherlands; New York Life Ins. Co., New York; the American Council of Life Insurers, Washington; and America’s Health Insurance Plans, Washington.

Tomas Serbinowski, a Utah regulator and life actuary, argued that if stranger-originated life insurance (STOLI) is the main concern, then he was not sure that a termination provision for these riders was the most effective way to prevent such solicitation. “We as regulators don’t like STOLI,” he added. And yet, he added, current life insurance standards have no similar provisions to prohibit assignment.

Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, asked, “What are the public policy concerns that this action is supposed to address?” If it is to protect consumers, he said that he didn’t see how it would help to take away their rights to sell what they bought. Rather, he continued, the life insurance industry is “trying to do for annuities what it does for the life insurance industry—prevent competition.”

Consumers are locked in to the rider, Birnbaum continued. He compared the industry argument to I.B.M. arguing for the mainframe computer and against PCs because they could hack into mainframes when personal computers were first invented.