This update provides a brief overview of recent activities of the National Association of Insurance Commissioners (“NAIC”) in connection with the issuance and regulation of contingent deferred annuities (“CDAs”).
A CDA is a type of annuity contract that provides guaranteed lifetime income payments if the assets in an investment account are exhausted during the life of the contract holder through allowable withdrawals and/or poor investment performance. The investment account contains the covered assets (often mutual funds or assets in a managed account). These assets typically are not owned by the insurance company that issues the contract and remain under the control of the contract holder.
A CDA in many ways resembles a traditional annuity with a guaranteed lifetime withdrawal benefit (“GLWB”) rider, which typically guarantees a minimum income or withdrawal amount for the life of the annuity contract holder. With a traditional annuity, however, the insurer holds and controls the underlying assets, whereas with a CDA a third party typically holds the underlying assets.
CDAs are currently subject to regulatory oversight by state insurance regulators, and in many cases the Securities and Exchange Commission and the Financial Industry Regulatory Authority. In 2011, the NAIC established the Contingent Deferred Annuity (CDA) Subgroup to review issues concerning CDAs. On February 22, 2012, a majority of the Subgroup concluded that CDAs resemble and raise the same regulatory issues as GLWBs and are best written as annuities though life companies, and not as financial guarantee insurance written through property and casualty companies. The Subgroup recommended the formation of a new working group to evaluate the solvency and consumer protections appropriate for CDAs. On March 4, 2012, the NAIC established the Contingent Deferred Annuity Working Group as part of the Life Insurance and Annuities (A) Committee.
In recent months, the Working Group has held several meetings and conference calls to discuss the regulation of CDAs. At a June 27, 2012 meeting, the Working Group heard comments from a number of regulators and industry and trade groups. Among other comments:
- a representative of the Actuarial Resources Corporation observed that CDAs would require insurers to maintain strong, comprehensive riskmanagement practices, with complementary regulatory oversight, and that current NAIC model laws for reserves and risk-based capital were appropriate for regulating CDAs;
- regulators expressed a common concern that poor market performance could result in a large number of CDA benefits being triggered at the same time; and
- representatives from industry and trade groups observed that insurers must properly reserve for risks inherent in CDAs, and that the existing regulatory framework, including enterprise risk management principles, was appropriate and sufficient for regulating CDAs.
In addition, a representative from the Government Accountability Office explained that it had commenced a study of the regulatory structures applicable to CDAs and other lifetime retirement income products and planned to release a report in the fall of 2012.
The Working Group heard further comments from consumer and industry representatives as well as the Department of Labor on August 11, 2012 and on August 29, 2012, discussed, among other matters, the application to CDAs of the NAIC Standard Nonforfeiture Law for Individual Deferred Annuities. The Working Group will meet again during the NAIC Winter Meeting in Washington, D.C.