“Complex” products risky to insurers, too

However, according to officials from the National Organization for Life and Health Guaranty Associations (NOLHGA), the GAO found out that while promises made under GLWBs, which are distinct from the investment portion of a variable annuity, are generally covered by state guaranty funds, such certainty does not exist with respect to CDAs. "As a result, a risk exists that if an insurer who sold a CDA became insolvent, consumers owning those CDAs might not collect any promised benefits," the report warned.

 The GAO said it conducted the research report to address the challenges faced by older Americans as they retire, including  health care costs, inflation and the risk of outliving their assets. It agreed that lifetime income products can help retirees have income throughout their retirement.

The American Council of Life Insurers )ACLI) spokesman Whit Cornman said that, as stated in the GAO report, "variable annuities with guaranteed living withdrawal benefits and contingent deferred annuities offer consumers important guarantees in retirement. These guarantees will play an increasingly important role as more and more Americans seek to secure their retirement incomes."ACLI agrees  with the GAO that consumers should seek professional advice and carefully choose an annuity that meets their individual needs, he said.

 The Insured Retirement Institute (IRI) also focused on the population's retirement income needs as overriding virtue.

"In an era when consumers will responsible for securing their own financial futures, it is vitally important that consumers have access to a wide array of sound retirement income solutions," said Cathy Weatherford, IRI president and CEO. "As American's struggle to manage the risks associated with retirement planning and uncertainty stemming from volatile markets and a sluggish economy, these lifetime income products offer consumers the certainty they seek during unsettling times."

Weatherford said, regarding the questions about the uncertain regulatory environment, that IRI believes that current regulatory oversight at both the federal and state levels is robust and effective, with enough safeguards in place.  

Of interest, the GAO report also discussed solvency risks to insurers that can arise when investment returns, interest rates, consumer longevity and consumer behavior are different from what they expected.

While a number of insurers and NAIC officials said that VA/GLWBs and CDAs do not pose undue risk to insurers, at least one major insurer has decided not to sell CDAs because of the potential risk involved, and another insurer said it does not sell VA/GLWBs because they do not fit with the company's risk profile, the GAO report stated. MetLife last year took a stance against the sale of CDAs. Prudential Financial is the major developer of CDAs, which have had—and are still undergoing—their day in court at the NAIC and are now gaining wider regulatory acceptance, if not by consumer representatives like economist Birny Birnbaum and, when last checked, New York state law.

Birnbaum said after a light look at hte report that it seems to be fairly noncomittal and returns to the theme of state regulatory variation.

The title of the report is: Annuities with Guaranteed Lifetime Withdrawals Have Both Benefits and Risks, but Regulation Varies across States.