Guidance, bulletin or reg? NAIC debates form of annuity illustration update

The Life Insurance and Annuities Illustrations Working Group is leaning toward a model bulletin to quickly address problems with annuity illustrations, while it works on revisions to Model Regulation 245.

On the fourth of four calls Tuesday, the group tentatively endorsed the strategy as a short-term fix. A fifth call is scheduled for Sept. 15 after members failed to get through a checklist of issues.

The working group is examining how insurers calculate and display nonguaranteed elements in annuity illustrations, including caps and participation rates. Members said current practices can produce unintuitive or overly optimistic results when current nonguaranteed values are applied retroactively to historical periods.

Under one approach discussed by members, insurers would continue to show historical index returns but would not necessarily apply today’s nonguaranteed elements to those historical periods. Instead, the illustration could use a prescribed rate, scenario or range to demonstrate how the nonguaranteed elements affect the final illustrated results.

If historical nonguaranteed elements remain part of the illustration, the group previously expressed preliminary support for applying “haircuts” or other adjustments to those elements.

Bonnie Burns, a training, policy and technical assistance consultant at California Health Advocates, urged regulators to keep consumers in mind.

“I get lost in a sea of numbers, and I expect I’m not the only one who does,” Burns said. “Consumers should be able to easily find the minimum benefits that they would be getting at the time that they need them in these illustrations.”

What rules do states follow?

Model 245 has been adopted by just 10 states, creating a patchwork of requirements while regulators consider changes. It also prompted questions on how a guideline or bulletin would apply to states that haven’t adopted the model.

Model bulletins from the National Association of Insurance Commissioners have no independent, direct enforcement mechanism. On its own, a bulletin is simply a guidance template or best-practice recommendation.

Dan Schelp, chief counsel of regulatory affairs for the NAIC, noted that an actuarial guideline would be “appropriate” but also unclear.

“The accounting practices and procedures manual doesn’t really give a mechanism on how to enforce an actuarial guideline that’s not included in the valuation manual,” he said. “So it’s a little unclear with respect to that.”

Carrie Haughawout, senior vice president, life insurance and regulatory policy for the American Council of Life Insurers, raised concerns that an actuarial guideline could establish a separate regulatory regime rather than simply bridge the gap until Model 245 is revised and adopted more broadly.

Bulletin and stopgap

Members settled on a bulletin that could draw on provisions already found in the NAIC’s annuity suitability model regulation, which has been widely adopted by states. That could make the temporary guidance useful even in states that have not adopted Model 245.

Working group chairman Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce, asked members to choose among three options: no stopgap measure, a stopgap measure or an actuarial guideline as the stopgap.

While not a binding vote, a straw poll showed support for having a stopgap measure, with the model bulletin emerging as the preferred mechanism over an actuarial guideline.

The working group spend the remainder of Tuesday’s call tackling additional illustration possibilities and supplemental information. Whether to allow additional information and data presenting the “range of risk” is a topic the group will continue discussion on the next call.

“The primary concern here is that the past 20 years right now doesn’t provide a full range of possible high and low scenarios,” Slutsker noted.

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