Consumers Left Out Of NAIC Annuity Process, Activist Says

February 26, 2013

By Linda Koco


A consumer representative ticked off a long list of concerns he has about the contingent deferred annuities during a conference call with regulators this week.

Berni Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, questioned the consumer value, fee structure, systemic risk issues, consumer protection safeguards, guaranty fund considerations and other aspects of these relatively new types of annuity products.

The comments came during a call held by the Contingent Deferred Annuity (CDA) Working Group of National Association of Insurance Commissioners (NAIC).

The purpose was to take comments on 16 or so recommendations that the working group is proposing for regulating CDAs. The regulatory issues have been under the microscope for over a year.

A CDA is a type of longevity insurance product that can be added to funds in a tax-qualified retirement plan or investment account held outside the annuity insurer. The products are similar to guaranteed lifetime withdrawal benefits in variable annuities in that they guarantee the consumer will receive income for life even if the value of the underlying account drops to zero.

A surprise

Birnbaum’s remarks came as a surprise. His organization had not submitted written comments in advance of the conference call—a situation that occurred, he said, because his staff did not receive notice about the session until a few days previous.

He promised to send written comments later in the week. But for now, he said his organization is recommending a moratorium be put on CDA products until NAIC can be sure a solid foundation is in place.

A moratorium is not something that annuity writers want to see.

In fact, Lee Covington, senior vice president and general counsel of the Insured Retirement Institute (IRI), Washington, voiced opposition to a recommendation that referrals be made to other NAIC bodies. The purpose of the referrals would be to obtain reviews of reserving requirements, risk-based capital requirements and financial reporting requirements as they relates to CDAs, according to the working group.

“At this time, we believe it is not necessary for the [NAIC Life Insurance and Annuities (A) Committee] to make a formal referral to other NAIC committees,” said Covington, who indicated he was speaking on behalf of Washington-based American Council of Life Insurers (ACLI) as well as IRI.

“We believe that a formal referral to any other committees will cause a number of states to withhold review and approval of CDA products until any relevant NAIC committee has reached conclusions,” he said in both written and oral comments.

That will likely happen in one or two years, and as a result, “thousands of consumers” will not have access to CDA products, he predicted.  

“Given the absence of a supporting reason,” he continued, “we believe a formal referral for continued evaluation of solvency, which would encompass a review of capital and reserving requirements for CDAs, is not necessary.”

Instead, he said, the working group should explore alternative recommended actions steps with respect to the financial regulation of CDAs.

Relevance for producers

The working group recommendations are aimed at regulators, with obvious implications for insurers. But a few of the proposed recommendations are relevant to producers as well.

For example, one recommendation is that CDAs be included in the one-time, four-hour producer training requirement that is part of NAIC’s Suitability in Annuity Transactions Model.

The model currently requires producer training only for producers with a life line of authority, the working group document explains.

Other recommendations say:

--The NAIC Suitability Model should be revised “to make it clear that the model applies to the sale of CDAs.”

--The same producer licenses that are required to sell variable annuities should be required to sell CDAs.

--The NAIC Producer Licensing Model Act should be amended to make the licensing requirements clear. “It may also be appropriate to develop a separate line of authority not only for CDAs, but also for future products that do not fit neatly within existing definitional framework,” the working group document says.

CDAs defined

There is one point about which all parties seem to be in agreement, at long last. This is the technical definition of CDAs. The proposed working group definition says:

“’Contingent Deferred Annuity’” means an annuity contract that establishes a life insurer’s obligation to make periodic payments for the annuitant’s lifetime at the time designated investments, which are not owned or held by the insurer, are depleted to a contractually-defined amount due to contractually-permitted withdrawals, market performance, fees and/or other charges. 

In their comment letters, the Washington-based American Academy of Actuaries, IRI and ACLI all said they agree with that definition. Even Birni Birnbaum, the consumer representative, told the regulators that he agrees with the definition, though he would like to see a definition for consumers too.

As recently as a year ago, some interests were contending that CDAs are financial guaranty insurance policies which are issued by property-casualty insurers. Now, the working group definition seems to have settled the matter: The CDA is as an annuity contract issued by a life insurance company.

Wisconsin Commissioner Ted Nickel, who led the conference call and chairs the CDA Working Group, said regulators will review comments and make edits between now and the NAIC spring meeting in April, where the working group will meet and vote on the final recommendations.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Jack Marrion

3/5/2013 8:49:54 AM - St. Louis

Mr. Birnbaum should be less concerned. A CDA buyer occupies a very specific niche. You have someone that is afraid of outliving their money due to market risk, but passes up the sure thing offered by a guaranteed annual increase in potential income offered by variable & index annuity GLWB roll-ups. The strongest market for CDAs may well be pension plan sponsors and they would provide more than adequate disclosure

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