Regulators wary of RILA hot market disruption with new rules
Concerns over the extent of the disruption to be introduced to the burgeoning market for indexed variable annuity products dominated the call from a subgroup of regulators today.
The Indexed Linked Variable Annuity subgroup is trying to modify the non-lapse rules to better suit ILVA’s unique products, also known as indexed registered annuities or structured annuities.
The subgroup developed an actuarial guideline for technical changes to ILVA values that would bring products in line with traditional VAs. Industry groups have suggested several changes and are mostly concerned about market disruption.
“CUNA Mutual has been serving consumers in the ILVA space for over eight years and our experience shows that ILVAs are an incredibly effective tool in helping middle-market customers create guaranteed retirement income,” David Hanzlik wrote. , Vice President, Annuity and Retirement Solutions for CUNA. “We are proud to help those who earn a modest income.”
But Birny Birnbaum, executive director of the Center for Economic Justice, questioned why regulators would agree to continued sales of products they deem problematic for consumers.
“This idea that [the approach is] solving this problem without even being able to discontinue certain products that are currently on the market suggests that this is not a serious business,” Birnbaum said. “Why wouldn’t you want to stop the sale of these products and stop them as soon as possible? as you could?”
Pete Weber, life actuary for the Ohio Department of Insurance and chairman of the subgroup, said Birnbaum was overstating the issue.
“This type of product fills a space in the market that could help promote better American retirement security in the future,” Weber said, adding that the products have evolved. “If we felt there was extreme abuse in this case, then that would be a different response.”
ILVA products hit the scene in 2018. Sales soared 55% in 2019 and another 38.5% in 2020, according to the Secure Retirement Institute. The products offer returns based on the performance of an underlying index.
But these returns are not directly invested in the market, reducing the risk of direct equity exposure, while maintaining crucial upside potential.
But ILVAs do not correspond exactly to two key model laws: Model 250, the regulation of the variable annuity model, and Model 805, the standard non-confidence law for individual deferred annuities.
The first establishes the non-lapse rules, or the rules that determine how much money a policyholder can get back if they forfeit the annuity, for traditional AVs. The latter sets the rules of non-forfeiture for fixed annuities.
The new indexed annuities did not fit well with the 250 model because their daily values are not based on the value of units in a separate account. Rather, Daily Values are based on formulas set out in the contract.
In a client alert, law firm Carlton Fields explained how the ILVA formula works:
- At the end of the index option term, looks at the performance of one or more indices.
- During the term of the index option, may take into account the time remaining until the end of the term of the index option, the change in the market value of the assets used by the insurer to cover its pay indexed interest, the variation of a hypothetical pool of assets that replicates the insurer’s coverages and/or the actual variation of the index to date, including the total loss to date.
Although similar types of formulas are used in many indexed annuity products, there are variations in how intermediate values are determined among ILVAs, the law firm noted.
Risk versus reward
The proposed GA would allow an indexed annuity to be considered a PV only if the provisional value of the annuity is based on the market value of (A) the actual assets of a separate account, or (B) of a portfolio hypothetical assets, each of which assumes the guarantees of the contract.
Regulators explained their reasoning at a meeting in December: if an ILVA owner is subject to the risk of loss, the contract holder should also benefit from gains, in actual segregated account assets or hypothetical portfolio assets. .
The ILVA sub-group opted not to expose the GA, but instead to meet at least once more before the spring meeting of the National Association of Insurance Commissioners next month.
Editor of InsuranceNewsNet, John Hilton has covered business and other beats in more than 20 years of daily journalism. John can be reached at [email protected] Follow him on Twitter @INNJohnH.
© All content copyright 2022 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reproduced without the express written consent of InsuranceNewsNet.com.