NAIC Subgroup Suggests All 'Hybrid' Annuities May Need Reserve Scrutiny

Schirripa said that he agreed with industry that the policyholder retains all the market risk as long as there is money in the covered fund but feels a big disconnect with industry on when the market risk is  removed from the insurer. He say he does not see it that way,  that the insurer still takes on market risk and it is not really clear what the benefit is, and what the buyer is paying.

If hybrid income annuities can be sold by life insurers, then so can synthetic hybrid income annuities, he said. The majority of the subgroup agree, he said, that much of the regulatory structure is already in place.

However, he said, "we want to reframe and revisit the issue from so many years ago–these are different times…," Schirripa said, saying  he was  trying to  avoid the discussion of guarantee products that helped trigger the 2008 market collapse. 

The "threshold" issue is not whether these products are an annuity or financial guaranty insurance but the hybrids as group, if  they can be sold by insurers, Schirripa suggested. If hybrid income annuities can be sold by insurers, he said, then so can the synthetic ones. 

Lee Covington, senior vice president and general counsel at the Insured Retirement Institute (IRI), expressed "great concern" over Schirripa's comments and questioned whether Schirripa was suggesting if all hybrid annuities should be sold by insurers. 

Schirripa said he thinks there is a "real need" to go back and see if the capital requirements and reserving methodology is there to protect companies, given the market risk of financial guaranty products in recent years.

In a statement to National Underwriter, Coving focused on the steps that the subgroup has made in treating CDAs themselves as annuities.

"We appreciate the opportunity the NAIC Contingent Deferred Annuity (CDA) Subgroup has provided us to contribute to the review process. We are, of course, supportive of their position that these products should be treated as annuities. Our consistent view has been that contingent annuities are annuities under state law, so we view the developments today as positive steps in the process.  We are also encouraged by their intent to apply existing rules to CDAs in an ongoing way. The existing regulatory rules governing the annuity industry have proven to be robust and effective. …. Regulators and the industry alike agree it is vitally important that consumers have access to a wide array of sound retirement income solutions. The recommendations made today will assure consumers will continue to have expanded opportunities to choose products that provide a financially secure future."

What the further scrutiny of other guaranty products means, leads to, if anything,  still remains unclear, but the issue will be sure to be hotly debated at the NAIC Spring National Meeting in New Orleans in early March.