State insurance regulators are continuing to wrestle with the contingent deferred annuity (CDA) product's place in the world of retirement and annuity products. Some agree a name change is required, and have suggested the industry develop one. Most parties involved agree that an exemption to the standard nonforfeiture law (SNFLIDA) for individual deferred annuities should be enacted. Others think there should be a special interpretation.
Because many (possibly even a majority) of the CDAs fall within the scope of the SNFLIDA, and because the application of the law is arguably unclear, either an exemption from the law or special interpretation would be required, concluded the regulator who analyzed the product for the NAIC's Contingent Deferred Annuity Working Group in a teleconference presentation Aug. 29.
Tomasz Serbinowski, an actuary with the Utah Insurance Department, told fellow regulators that certain products, like some group annuities, annuities in the payout phase and variable annuities, are exempt from the law but many CDAs would not fit any of the existing exemptions.
However, Serbinowski said it is unclear how to apply the law to CDAs.
The nonforfeiture law provisions vary depending whether a contract provides cash value benefits. However, CDAs do not provide any lump-sum settlements (nor any death benefits) and hence are not required to provide cash values.
There are two tests for the nonforfeiture law, a retrospective and prospective one, but there is confusion over defining some values like premiums, the discount rate and maturity value, according to Serbinowski's analysis, which was generally supported by the working group.
Still, regulators have for months now tossed the concept of CDAs around and determined more clarity is needed on many fronts.
In February, CDAs were declared to be a hybrid product, by the CDA subgroup at the time. Industry support for the CDA as an annuity has been great, with the notable exception from MetLife, who challenged, with some state insurance officials, that CDAs are a financial guaranty product. New York and MetLife are said to have backed away from that stance.
Insurance departments could regulate the product as an "annuity" after thorough reviews/adjustments, especially modifications in reserve methodologies (AG 43), and the filing process for guaranteed lifetime withdrawal benefit features, according to the subgroup's discussion.
Mark Birdsall, chief actuary with the Kansas Insurance Department, told regulators more work needs to be done on reserving and risk-based capital (RBC) for this product and that the Life Actuarial Task Force (LATF) or the Life RBC working group could be the group to deal wit it. He said there needs to be significantly more analysis on the unique aspects of these products.
NAIC long-time consumer advocate Birny Birnbaum of the Center for Economic Justice reminded the group that they should look at products with similar features, as well.
One regulator from Tennessee suggested that CDAs may be considered synthetic deferred annuities since the company doesn't own the asset and raised the possibility of a separate chassis for them.
The annuities are not risky but could become very risky if the underlying assets are risky, pointed out Michael Humphreys, from Tennessee's department of commerce and insurance.
