NAIC Targets 'Unrealistic' Annuity Illustrations

August 08, 2011

By Linda Koco
Contributing Editor, InsuranceNewsNet

State regulators are close to adopting new rules to combat what they have been called “unrealistic” illustrations that companies offer with fixed annuities.

If the regulations are adopted and implemented, producers would have to present buyer’s guide and disclosure documents at the same time that they present the product illustration, even if the client never decides to buy. Also, the illustrations they present must meet specified standards, thus barring use of illustrations that vary widely based on software used and personal preference.

The illustration requirements are included in proposed changes to the NAIC Annuity Disclosure Model Regulation. The Life Insurance and Annuities (A) Committee of National Association of Insurance Commissioners (NAIC) adopted the proposed changes at an early August teleconference.

The proposed update will now go to NAIC’s late August meeting in Philadelphia for consideration, says Jim Mumford, chair of NAIC’s Annuity Disclosure (A) Working Group.

Mumford, who is also first deputy insurance commissioner and securities administrator in the Iowa Insurance Division, predicts that NAIC will adopt the newly updated model with a two-thirds majority vote. That would make the proposed illustration regulations a formal part of the NAIC disclosure model.

This would be the first change to the disclosure model since its 1999 adoption.

Only 16 or 17 states have implemented the original, but Mumford believes many if not most states will adopt the new version.

Illustrations offered with traditional fixed and indexed annuities are not subject to any regulations, he explains. But use of illustrations with fixed annuities has been growing over the past five years, and some of the documents are “pretty unrealistic,” he says. Some industry groups have complained about inconsistencies, as have state regulators.

As a result, “a lot of states” want the new regulations, he says. Industry groups are behind the initiative too, he says.

The NAIC Annuity Disclosure Working Group was formed three years ago to look into the matter.

The proposed regulations that have resulted do not affect illustrations for variable annuity products. Those illustrations are already subject to regulation—by the Financial Industry Regulatory Authority (FINRA).

Impact on producers

The new illustration provisions appear in a new Section 6 of the updated disclosure model. This section sets standards for carriers that offer fixed and indexed annuity illustrations. But producers will need to know some things about the regulation if their state adopts the proposed new disclosure model, says Mumford.

“First, producers should know that the illustrations won’t necessarily show how the product values will end up—not even close. In the case of fixed indexed annuities, they will show how the product works in different scenarios, such as good markets and bad markets,” he says.

“Second, for traditional fixed annuities, the illustrations would be required to show current rates. So you can’t illustrate interest rates other than what the insurance company is currently offering for the product. You can’t go higher and you can’t use wild assumptions.”

These rules will level the playing field between illustrations for traditional fixed annuities and fixed indexed annuities, Mumford says.

“It would be best if advisors don’t show and illustrate those products side by side with a variable annuity,” the regulator adds, “because the illustration requirements aren’t the same.” 

Package deal

The revised model would impact producers in another way, as well. “If they are presenting a traditional fixed annuity or a fixed indexed annuity, they would be required to give the customer the buyer’s guide for annuities, the disclosure document for the product—and the illustration if the carrier offers one.”

Not all carriers offer fixed or indexed annuity illustrations, Mumford points out. “It’s entirely voluntary.” But if the company does provide one, “the producer must present it with the other two documents. It’s a package deal.”

If the producer is offering a variable annuity, the producer would have to give the customer a buyer’s guide for annuities, in addition to the prospectus required by the Securities and Exchange Commission (SEC) and the illustration required by FINRA. “Again, it’s a package deal,” says Mumford.

During the recent teleconference on the proposed regulations, Mumford amplified on the package deal point. According to the proposed regulations, he says, all three documents must be given to the client even in scenarios where a customer is not making application but is, say, participating in an informational or educational session during which an illustration is presented.

The Annuity Disclosure Working Group was “pretty adamant” about this, Mumford said. The group didn’t want to let that illustration (go) out there all alone, without all the other information.”

Other proposed changes

In other proposed revisions, the disclosure model would include a definition of market value adjusted annuity. It is the same definition as appears in the Interstate Insurance Producer Regulation Commission, “because it’s pretty much accepted by everybody,” Mumford says. The definition says:

“Market Value Adjustment or MVA feature is a positive or negative adjustment that may be applied to the account value and/or cash value of the annuity upon withdrawal, surrender, or death benefit payment or contract annuitzation based on either the movement of an index or on the company’s current guaranteed interest rate being offered on new premiums or new rates for renewal periods, if that withdrawal, surrender, or death benefit payment or contract annuitization occurs at a time other than on a specified guaranteed benefit date.”

Also, the disclosure section of the proposed version says that, if the SEC has not completed developing a summary prospectus by Jan. 1, 2014, the disclosure requirements in the NAIC model would apply to variable annuities.


Several insurance trade groups provided extensive input on the model revisions. These include the American Council of Life insurers, American Academy of Actuaries, and National Association for Fixed Annuities.

The disclosure model is not the same as the NAIC’s Suitability In Annuity Transactions Model Regulation, most recently updated in 2010.

The suitability model regulates pre-sale requirements for carriers and advisors, to ensure that what they are selling to the customer is suitable for that customer, says Mumford. The disclosure model regulates disclosure to the customer. Its purpose is to “ensure that customers have all the information they need to be sure what they buying what they think they are buying.”

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

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The annuity cop

8/10/2011 4:19:06 PM - nationwide

Ladybird, good points all around. The jury is still out on income rider costs, very few clients are actually triggering their income rider and according to LIMRA in 2009 less than 20% of annuity owners ever take a dime out of their annuity. FIA's are a great place for safe money but these income and death benefit rider's could be an issue for some beneficaries. Income riders are VERY profitable for the insurance companies selling them. Advisors need to crunch the numbers to see if they are a fit


8/10/2011 3:46:08 PM - Detroit, MI

Wacky Mackey, what about what they have made, and the fact that they wouldn't have just lost 30% this week? And don't all investments have fees, 12b-1, "management" by brokerage firm, etc.? But those with brokerage firms basically pay their advisor to lose them money, at least with the FIA, they don't lose anything! Also, all the companies I work with, the fee only applies if they have selected an income rider option, where they get an increasing income even if their accumulation account has

Wally Mackey

8/10/2011 3:29:40 PM - Tampa, FL

What needs to be disclosed is the actual cost of the rider over the lifetime of the contract. For example, let's assume the annuity averages a 5% interest rate. A .75% rider fee effectively reduces the 5% to 4.25%. If the 60-year buys the annuity with $300,000 and triggers the rider at age 65, at age 95 the policy owner will have paid $220,956 in fees. Who is telling the prospect the rider may cost over $200,000 over their lifetime?

The annuity cop

8/10/2011 3:14:34 PM - nationwide

Finally, the unethical IMO's and third party product providers are going to get reeled in. It is sad that it took this long. Clients and advisor's have been deceived by software vendors, BIG marketing companies,"hired gun actuaries" (that have made millions) and the back-casting SCAM of FIA strategy returns that are deceptive if not meaningless since the melt down of the market in 2008, and again today. If anyone tells you that their FIA strategy is better than others----RUN.

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