Annuity Disclosure Discussion Focuses on What Serves the Consumer

Efforts to finalize an annuity disclosure model regulation are focusing on how to balance the need for oversight of illustrations for non-guaranteed elements in annuity products with insurers’ desire to make keep the annuity market healthy at a time when a swell of baby boomers may need regular income.

The discussion over the Annuity Disclosure Model Regulation is part of an effort to wrap up the effort at the National Association of Insurance Commissioners, Kansas City, Mo., and advance it toward final adoption. Connecticut Commissioner Tom Sullivan, chair of the NAIC’s Life & Annuities “A” Committee has made it clear that he wants the Annuity Disclosure working group to advance the draft to the “A” Committee by the NAIC fall meeting in Orlando next month.

As part of that effort, Jim Mumford, the working group chair and first deputy commissioner with the Iowa insurance department, has set up a series of conference calls to finish work within the month. The discussion on Sept. 3 included an explanation by Mumford of when annuity companies would be allowed a safe harbor from disclosure requirements. Companies which have variable annuities that are in compliance with the Securities and Exchange Commission or Financial Industry Regulatory Authority rules would satisfy the regulations requirements, Mumford explained. If the SEC has not developed a summary prospectus for variable annuities before Jan. 1, 2013, companies would be required to comply with Section 5 of the regulation after that date.

A Buyers Guide would have to be provided for variable annuities, similar to current requirements for fixed annuities. If an illustration is provided, it would have to be used for all sales made on that particular product.

The safe harbor was developed because of concern among VA writers that there would not be sufficient time to prepare for new requirements, according to Mumford.
Lee Covington, senior vice president and general counsel with the Insured Retirement Institute, Washington, emphasized the importance of guaranteeing income and the priority the Obama administration and Congress is giving the issue. “We are trying to reduce the barriers to annuities and 401(k)s. We want good regulation but not something that will restrict the product.”

Feedback from distributors, according to Covington, suggests that illustrations should not be mandatory for all contracts in a policy form. A mandatory illustration requirement would be cumbersome to consumers and advisors, he added.

Variable annuities are already regulated and if there is a not in good order (NIGO) designation because of illustration requirements then distributors’ reps are less likely to recommend them, Covington added.

Wire house stock brokers want to drop a ticket on the same day and if they have to wait three days until disclosures are provided, they are not going to do that, he added. Some companies will choose not to use illustrations, he continued. That would deny advisors and consumers who find them useful, the right to use them, according to Covington.

Ron Panneton, senior counsel-state and government relations with the National Association of Insurance and Financial Advisors, Falls Church, Va., said that the purpose for illustrations it to help customers and flexibility on their use is needed to avoid a situation that could be “disruptive and confusing to the sales process.”

Mumford responded that the requirement that an illustration be used for all contracts in a particular policy form was to stop the use of an illustration only when it was good for the seller and not the buyer. “I have a tough time allowing producers to produce one when they want and not produce one when they don’t want to.”

Eric Dupont, assistant vice president and government relations counsel with MetLife, New York, said that illustration software is developed by Met Life and its producers can only use that software which is compliant in all states. But the discussion turned to third party software and how regulators needed to address that issue.

There is not a mandatory illustration rule for securities and to require one for annuities is setting up an uncompetitive situation, according to Kim O’Brien, executive director of the National Association of Fixed Annuities, Milwaukee. If an advisor wants to make a comparison of two contracts, it takes away that evaluation process from the advisor if a company decides not to illustrate for any annuity rather than to meet the requirement to illustrate for all annuities of a particular policy form, she added.

Utah regulator and actuary Tomasz Serbinowski, asked about products that are not officially designated to be illustrated and what actually constitutes an illustration. “Do we have a clear rule about what it means to be illustrated?” Regulators need to “figure out what it is that bothers us if an annuity illustration is shown to consumers,” Serbinowski said.