Monday, October 18, 2010

Are Separate Accounts Being Used to Skirt Nonforfeiture Requirements?

The question a number of regulators raised is whether product standards are being used to help life insurers skirt nonforfeiture requirements, which guarantee contract holders some value if their contracts lapse or are surrendered.

The discussion during the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., focused on the Interstate Insurance Product Regulation Commission, Washington, and some standards that are up for consideration by the entity which provides a single source of filing for life insurance products.

The issue, raised by Blaine Shepherd, a Minnesota regulator and life actuary, involves index linked features for individual deferred variable and non-variable annuities. The benefits are offered through a separate account and are not subject to the strictures of nonforfeiture requirements, according to Shepherd. These are fixed annuity products offered through a separate account, he explained. Fixed products are usually backed by an insurer’s general account. Consequently, there needs to be a discussion of the real purpose of the use of a separate account, Shepherd continued. “It seems that separate accounts are being used to accomplish ends that could not be accomplished if they were not funded through a separate account,” he continued.

Utah regulator Tomasz Serbinowski agreed that the “real question is what is the proper use of a separate account?”

The issue ties into another issue of whether separate accounts are insulated from the general account and an insurer’s creditors in the event of an insolvency, added Richard Marcks, a Connecticut regulator and life actuary.

Serbinowski asked why companies should have the option to file these products as either a variable or fixed annuity product depending on what suits them best. “There is an issue here. There is no objective standard.”

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