Wednesday, October 13, 2010

Is It Soup Yet? Opinion Divided Over Annuity Disclosure Work

Proposed annuity disclosure requirements are about to be advanced by state insurance regulators after over two years of work. But insurers and actuaries are raising concerns over whether the work is ready.

During the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., next week, a draft of the annuity disclosure model regulation will be moved from the working group to its parent “A” committee as required by the group’s charge.

But the project, which has been under discussion for over two years and has had numerous drafts exposed for public comment, is receiving kick back from the American Council of Life Insurers, the American Academy of Actuaries, and the Insured Retirement Institute, all based in Washington.

At the end of the most recent discussion today, Kelly Ireland, an ACLI representative, asked whether broad support to hold the draft for a short time period might be given consideration. Jim Mumford, chair of the working group and Iowa’s first deputy insurance commissioner, said that a draft needed to be advanced. He suggested that interested parties who want to hold the draft for more discussion should take it up with the NAIC’s “A” Committee. He said that if the “A” Committee does decide to hold up the model, it should look at take a few specific points of concern and examine them rather then re-exposing the whole model since it had been through a number of exposures already. However, Alabama regulator Steve Ostlund said that the draft should be re-exposed because the latest draft with a number of changes is expected to be released on October 14 less than a week before a vote.

The differences in approach in crafting the model were illustrated during a discussion on use of a current rate to illustrate fixed indexed annuities. For instance, Utah insurance regulator Tomasz Serbinowski maintained that seven to 10 years would be a good time period to illustrate favorable and unfavorable performance in an indexed product so that the product could be understood by consumers. The discussion continued about whether there was value in illustrating for up to 30 years and whether that extended illustration better identifies how the index works over time.

Lee Covington, representing the IRI, said that showing the guaranteed rate for a prolonged period of time puts the product in a better light. But Iowa’s Mumford pointed out that the 30-year time period was taken from life insurance illustrations and that consumers keep life insurance products longer than they keep annuity products. Covington responded that most financial planners are creating retirement plans that span to age 90-95 for clients and that more long-term planning is now more important with new fiduciary standards. He argued that a shorter illustration would put insurers at a competitive disadvantage with other sectors of the financial services market.

Barbara Lautzenheiser of Lautzenheiser Associates, Hartford, Conn., said that using both current and long-term guarantees as well as high and low scenarios in an illustration provides the consumer with a better understanding of where she is and where she needs to go.

Mumford asked if a reasonable cap of 8 percent for current interest rates in illustrations could be established. The ACLI’s Ireland responded that the ACLI had offered a solution which would feature a high and low scenario and a cap of 6 percent for fixed annuities. Mumford said that he would take a look at it.

Kim O’Brien, representing the National Association for Fixed Annuities, Milwaukee, said that financial planning organizations such as the Financial Planning Association, Denver, did not have specific standards for the number of years a financial plan should encompass. IRI’s Covington followed up by saying that a limit of 15 years could conceivably prevent a company from illustrating annuitization values, the cash streams created by turning a lump sum value in the annuity to regular income. He said, for example, that if the annuity was purchased at age 50, then the consumer could not see the annuitization value at age 70.

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