NAIC to Scrutinize Contingent Annuities

DuPont beleives the matter should not only be taken up by the Life Committee but by with representation  from the Financial Condition Committee.

Six other states also maintain laws or regulations that follow the sections of the NAIC model relevant to New York's opinion:  Alaska; California; Connecticut; Florida; Iowa;  and Maryland. 

However, the AAA took another tack, stating that the "basic regulatory framework in place for other products can be applied to contingent annuities with little or no modification."

The AAA also stressed the public policy benefits of contingent annuities to the NAIC, noting that "contingent annuities can be a beneficial annuity product for many consumers." 

"We performed an analysis of the risks covered by the contingent annuity that demonstrates that the product provides material protection against longevity risk in addition to market risk," the AAA letter stated.

The AAA conceded that although there does not appear to be definitive guidance in all state insurance laws limiting the sale of life contingent products to life insurance companies, the contingent annuities working group knows of no state that would permit a property/casualty insurance company to offer for sale an insurance product with a material life contingent component.

Anticipating MetLife's and New York' s stance, perhaps, the letter argued that  a contingent annuity is very different than financial guaranty insurance because it does not insure the covered assets, protect against loss of the covered assets, or promise that a specific amount of covered assets will be maintained upon occurrence of a market decline.  Instead, the contingent annuity provides insurance protection with respect to a specified life, guaranteeing lifetime income payments to the purchaser following the depletion of the covered assets while that purchaser is still living irrespective of the performance of the covered assets.

The AAA encouraged the NAIC and other state insurance regulators to seek uniformity in state laws to facilitate consistent review, issuance and regulation of these products in order to provide consumers with another product alternative that can protect against longevity risk through guaranteed lifetime income coverage.

While Prudential Financial, in New Jersey, publicly supported the AAA working group's analysis, noting the product does not "indemnify loss," Mark Birdsall – the Kansas Insurance Department actuary who is active on the life actuarial task force of the NAIC – expressed reservations. 

"We reviewed a product similar to what is being described here – we determined this product structure does not fit the current regulatory structure," while it may be in the public interest, Birdsall said.  

For more, consider AAA's analysis on the similarities and differences between contingent  annuities and variable annuities with guaranteed living withdrawal benefits as detailed in the Oct. 28 letter addressed to Adam Hamm, chair of the Life Insurance Committee and  North Dakota's Insurance Commissioner: 

There are differences between contingent annuities and variable annuities with guaranteed living withdrawal benefits:

1. A contingent annuity applies a benefit to assets not directly managed by the insurer, where variable annuities are directly maintained and managed by the insurer.

2. Contingent annuities are stand-alone contracts, but the guaranteed living benefits provided with variable annuities are directly tied to the base contract.

There are many similarities between contingent annuities and variable annuities with guaranteed living benefits:

1. Consumer protection against longevity risks by providing a guaranteed lifetime income stream

2. Consumer protection against market risks

3. Insurer ability to manage the basis risk, when the necessary contractual and

operational controls between insurer and asset manager are in place

4. Similar suitability and disclosure issues,

5. Sophisticated risk management processes and comparable regulatory oversight is essential.