Annuity Minimum Values Debated

Two interest rate benchmarks are being advanced: a Treasury rate benchmark proposed by the ACLI and a SWAP rate the American Academy of Actuaries is recommending that regulators consider.

Once the benchmark is developed, Jones continues, then a model law can be created. However, she says the ACLI draft regulation is problematic because it gives insurers discretion to change rates and does not include disclosure requirements to consumers.

"Although, I think of myself as a free market person, the consumer needs protection," says John Hartnedy, an Arkansas regulator. He says he wants to make sure that consumers get at least the minimum nonforfeiture value they are entitled to in their contracts and that fair interest rates are used to determine those values.

Some insurers, such as Transamerica Occidental Life Insurance Company, Los Angeles, say they need a solution now. State legislatures want to enact a permanent solution rather than take a two-step approach of enacting a temporary and then a permanent solution, according to Diana Marchese, a vice president and assistant general counsel with Transamerica Occidental.

Insurers need a permanent index solution they can bring to state legislatures when sessions start again in January, she says.

The index would create a minimum crediting rate for nonforfeitures, she adds. For competitive reasons, insurers could select a higher minimum crediting rate after assessing factors such as the product and its features and returns on investments.

A model law was offered, says William Schreiner, an ACLI actuary, because there was a question as to whether regulators wanted just an index or a broader option. ACLI will continue to work on an index as well as an index with an alternative, he adds.

The current ACLI draft would operate in a 1%-4% range. Any time the interest rate fell below 2.5%, the rate would have to be reset at the earlier of 10 years or the redetermination date specified in the contract, Schreiner explains.

ACLI favors disclosure to consumers, according to Schreiner. "You cant sell the product without it."

An existing annuity disclosure regulation adopted by the NAIC would help provide consumers with needed information if states decide to adopt it, he adds.

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 23, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.