Insurance Compact warns NAIC some annuity designs ‘quite complicated’

In one product trend, regulators are seeing more guaranteed living withdrawal benefits attached to non-variable annuities.

And those products are “quite complicated,” said Katie Campbell, an actuary with the Interstate Insurance Product Regulation Commission.

“It takes quite a bit of time to understand what they’re doing and understand the examples,” she said Monday at the National Association of Insurance Commissioners’ fall meeting. “It’s like you need a tree structure on some of them to just figure out [where different options lead]. … It’s quite complicated to figure some of them out.”

Campbell gave an update to the Life Actuarial Task Force at the NAIC meeting in Hollywood, Fla.

Known as the Insurance Compact, the IIPRC is a multi-state agreement that allows states to coordinate on regulation and create a uniform product review standard. Its main purpose is to simplify insurance compliance for companies that operate in multiple states while protecting consumers.

The compact reviews life, annuity, disability income and long-term care insurance products. For the year to date, the compact received 925 filings, Campbell said. About 35% of them are individual annuity products, and 37% are life insurance products.

“[T]hat’s kind of a flip flop,” Campbell explained. “We used to have [about] 60% were life products, but we’re seeing that even out now with a lot more annuity filings.”

On the life side, most filings are whole life and term products, she said. Universal life makes up just 6% of filings, but are “the most time-intensive life filings that we get,” Campbell said.

Complicated annuities criticized

Many annuity manufacturers are under a spotlight for the complicated annuity constructions. Consumer advocates and many within the industry say that consumers can’t possibly understand the complex crediting strategies and index performance parameters.

Annuities seem to be the prime area of innovation, Campbell said.

“We’re seeing more complex index strategies,” she said. “Recently we’re seeing … minimum guaranteed crediting in those index strategies. So, it’s not just a return on the index, it’s you’re guaranteed a certain return.”

Other innovative annuity products come with rider charges for “what I call buy up options where … the money is spent to increase the participation rates in the caps,” she added.

Likewise, the compact is seeing a lot of annuity products where all of the credit strategies are in riders. So even the fixed account guaranteed interest accounts are in a rider form, Campbell explained.

“So, say they have a one-year term,” she said. “At the end of that term, the company can decide whether they want to offer any [crediting strategy], including the fixed income strategies or fixed account strategies.”

‘Baffles my mind’

Mike Yanacheak, chief actuary at the Iowa Insurance Division, said, “the idea of a base contract without a fixed account just baffles my mind.”

“For a contract to exist, there has to be an exchange of consideration amongst the parties,” he added. “If a base contract does not have any accounts. How does that take place?”

Other state regulators chimed in and said they can “lump” riders in a part of the base contract.

“One of the concerns we had when we started seeing some of these where, when you take the fixed account out, that means you don’t necessarily get that offered at the end of the year either, but they’re always going to offer something,” Campbell explained.

“We started asking the companies, ‘Okay, are you always going to offer this particular fixed interest strategy?’ And some of the companies said, ‘Yeah, will always offer it.’ They just want it in a rider form.”

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