Consumer representative to the insurance regulators, Birny Birnbaum, and his Center for Economic Justice, is not relenting on the problems he finds with contingent deferred annuities (CDAs), calling them a dangerous product for consumers in a letter to regulators.
"CDAs are a dangerous product for consumers. CDAs pose additional risks compared to other insurance products, which promised consumer benefits far into the future and which have either proven to cause harm to consumers long after the consumer's choice of alternative investments is gone or for which insurers have changed key terms of the product to alter the value proposition long after the consumer's choice alternative investment is gone," Birnbaum wrote, referring to long-term care insurance (LTCI) and variable annuities with guaranteed lifetime withdrawal benefits (GLWB).
The comments were made Aug. 20 to the National Association of Insurance Commissioners (NAIC) Life Insurance Committee regarding draft charges for the CDA Working Group.
Birnbaum calls for the appointment of a new group to identify potential consumer protection issues associated with CDAs and for consumer protection requirements related to their sale and administration. In the comments, Birnbaum claims that CDAs are more dangerous than LTCI or variable annuities with GLWB "because the CDA is effectively a naked option on the market value of the consumer's investments."
Birnbaum, a longtime NAIC funded consumer advocate and also a member of the Federal Insurance Office's (FIO) Federal Advisory Committee on Insurance (FACI), then dives into the recent cutbacks insurers are instituting with existing customers of variable annuity with GLWBs, changing the basic value of the product long after consumers had an option for an alternative investment.
The economist and former regulator links these issues with future problems for CDAs, stating that even the NAIC CDA subgroup noted that the likelihood of an insurer paying a benefit under GLWB or a CDA, which he says is simply a GLWB without the underlying annuity, is highly correlated with the riskiness of the investments allowed by the consumer.
The CDA subgroup demonstrated that a consumer purchasing a CDA and investing in bonds had a very small likelihood of collecting a CDA benefit, he stated.
Over the past couple of years, Birnbaum noted, many variable annuity insurers have clamped down on fund choices, raised fees, forbidden additional account contributions and sought to buy back the contracts, and in one of the latest efforts, Hartford Financial Services is requiring owners of certain guarantees to move at least 40% of their money into bond funds — and lose their guarantee if they fail to transfer the money out of stock funds.
