Contingent Deferred Annuities (CDAs) can present significant risks to insurance if they are unmanaged, the actuary overseeing the Contingent Deferred Annuity (CDA) Subgroup of the NAIC noted, recounting overarching messages he heard on a regulator-industry conference call Thursday, Jan. 26, to discuss the controversial products.
Although demand for the product continues to be emphasized by insurance groups, regulators and some interested parties kept returning to the issue of risk and whether the products would be covered if they failed by the state guaranty fund.
The question was raised by an interested party on the conference call to discuss ongoing work and thoughts from interested parties on CDAs. The party said he was a novice at the issue but was worried about the specter of long term care insurance debacle where companies that only sold LTCI made promises they couldn't keep, actuaries said everything would be fine in reports. In actuality, insurers found policyholders are much more likely to keep the policies in force than the actuaries had expected, and claims have been somewhat higher than expected. Metropolitan Life announced in November 2010 that it would no longer sell new long-term care insurance policies in either the individual or group markets after the end of 2010.
Whether or not the products are covered by guaranty funds will take years to resolve, Felix Schirripa, chief actuary with the New Jersey Department of Banking and Insurance said on the call.
Schirripa did say that the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), voluntary association made up of the life and health insurance guaranty associations of all 50 states, the District of Columbia, and Puerto Rico, is looking into CDA consideration.
But the determination in the future shouldn't stall the NAIC's progress is trying to classify the product and determine its treatment, some agreed.
However, Birny Birnbaum of the Center for Economic Justice said on the call that just because there is a demand in the marketplace, then that doesn't mean it is appropriate, legal or reasonable to sell it as an annuity, echoing MetLife's entrenched stance on the issue.
MetLife, the largest insurer in both the American Council of Life Insurers and the Insured Retirement Institute associations, is the chief and only dissent in both trade associations holding firm to the position that the CDAs shouldn't be sold an annuities and present great risks to insurers. See: //www.lifehealthpro.com/2012/01/19/metlife-and-pru-square-off-over-contingent-deferre?page=2
Birnbaum, a consumer advocate and economist, said that a CDA seems to him to be a derivative type of product which leverages the risk to insurers, and that it is really essential to find out how much product is already out in the marketplace, how much exposure insurers are facing and also if guaranty fund coverage is indeed available for them.
Prudential's representative said on the call that the company would not want these products to create any concerns echoed by some, and that the company is a proponent of appropriate regulatory guidance and oversight as a way to reduce risk.
We believe there are appropriate protections, in terms of managing the risks around externally held assets, Prudential's representative said.
He echoed the firm's letter, which argues that "Prudential firmly believes that the risk can be managed through rigorous diligence on asset management programs prior to making the contingent annuity available…"
To be sure, there is some element of market risk that exists with respect to CDAs, Prudential stated, but kept noting the products cover longevity risk, the hallmark of an annuity product.
