NAIC working group pressed to accelerate annuity illustration overhaul

The Life Insurance and Annuities Illustrations Working Group has been nibbling around the edges of annuity illustration reforms for months. During a Tuesday meeting, Iowa Insurance Commissioner Doug Ommen urged regulators to take a much bigger bite.

Ommen joined a scheduled conference call to deliver a stern message from the parent Life Insurance and Annuities Committee.

“It’s my opinion that illustrations or charts that are used to create unrealistic expectations in the minds of annuity holders are not only unfair and deceptive; They present a significant reputational risk to the entire business,” Ommen said.

Under Chairman Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce, the working group is weighing revisions addressing illustration length, disclosure requirements, accountability measures and how insurers present nonguaranteed crediting rates.

Also on the table is whether historical index performance should continue to be used as the basis for projecting future results. The working group is part of the National Association of Insurance Commissioners.

One issue receiving particular attention is “backcasting,” a term that Ommen said has had different meanings in the industry. In the current discussion, he said it refers to hypothetical index performance histories that show an index’s performance during years before the index actually existed.

Ommen said the working group should focus primarily on fixed-indexed annuities but also monitor federal market regulations affecting registered index-linked annuities, or RILAs.

The Financial Industry Regulatory Authority, or FINRA, does not allow hypothetical index performance histories in RILA marketing or illustrations, Ommen noted.

No hypotheticals

Conceptually, the working group has decided not to permit hypothetical index returns, even if the index components existed during the historical illustrated period.

That left regulators to discuss how to treat non-guaranteed elements, including caps and participation rates, which can change over time.

Three approaches were considered:

1. Continue the current Model 245 practice of using current nonguaranteed elements throughout an illustration.
2. Keep Model 245 as is, with adjustments or “haircuts” to nonguaranteed elements
3. Calculate what nonguaranteed elements could have been available historically based on option costs.

Regulators expressed concerns about the complexity of the third approach. “It is so complicated that you know it leaves itself open to maybe loopholes or interpretations,” said Joshua Blakely of Oregon.

Several participants instead supported exploring a separate approach that would use standardized projections while presenting historical index performance separately rather than using historical returns to project future results.

Regulators have informally collected illustrations from roughly 25 to 30 of the top annuity market leaders, an information-gathering exercise that led to the effort to reform Model 245.

A preliminary review found that about one-third of companies showed a top illustrated annual returns of 10% or lower. The remaining two-thirds showed at least one product or index with illustrated returns above 10%.

Of those above 10%, roughly half fell in the 11% to 15% range, while the rest ranged from 16% to as high as 27%.

Regulator: Show historical returns

Mike Yanacheak, chief actuary at the Iowa Insurance Division, suggested that historical index returns or historical credited rates could be shown in a table similar to disclosures used for other investment products.

“The numbers should be something like one-year return, five-year return, 10-year return, so that you have different numbers that actually convey what that return to be,” explained Tomasz Serbinowski, an actuary with the Utah Insurance Department.

The proposal drew interest from members as a possible middle ground between current practices and more complicated historical calculations.

The group is expected to continue considering alternatives to historical projections and non-guaranteed element assumptions. Its next call is scheduled for Tuesday to address additional scenarios and a potential stopgap approach before the group moves toward more specific proposals and redlines.

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