An investor advocacy group took a shot at indexed-annuity illustrations — the primary sales tool used to sell insurance products — and said that current rules around illustrations are too flimsy, allowing insurers to use them in a way that benefits them but disadvantages consumers.
In a recent comment letter submitted to the National Association of Insurance Commissioners, the Center for Economic Justice specifically took issue with indexed-annuity products linked to a "hybrid" index.
Whereas traditional indexed annuities tie their returns to a well-known market index like the S&P 500, hybrid products often combine several different indices, have a bond or cash component and allow an asset manager to control for volatility. These indices, according to the CEJ, are "opaque" and "can be created out of thin air."
The NAIC created a working group toward the end of 2016 to look at whether it should amend current rules around annuity illustrations, which project annuity performance, to accommodate hybrid products. Current rules only allow insurers to illustrate indices that are at least 10 years old — creating a conundrum for the industry since most hybrid annuities aren't that old.
While insurers want to reduce the 10-year provision, the CEJ argued that there are "serious problems" with the current model and industry ideas on how to amend it. It wants to double the time frame to 20 years.
Insurers are currently incentivized to "create products designed to produce ever more extravagant and fantastic illustrations," with the ultimate effect of consumers seeing their "scarce retirement assets stripped away," according to the CEJ's comment letter.
There are currently more than 90 hybrid indices available on the market, many of which have been developed since 2012, said Sheryl Moore, head of consulting firm Moore Market Intelligence.
Indexed annuity products typically have features that limit investor returns to the upside, such as an interest-rate cap. However, insurers market hybrid products, which typically have built-in volatility control features, as having unlimited upside.
Quarterly sales of hybrid products have nearly doubled since 2014, to $6.4 billion in the fourth quarter of 2018, according to Wink Inc.
"Development of hybrid indices is the single-biggest driver of new product development in the indexed annuity market," Ms. Moore said. "When regulators propose potentially decimating a $24 billion annual market, it certainly gets the attention of insurance companies, investment banks and other stakeholders."
Industry trade groups, such as the Insured Retirement Institute, the American Council of Life Insurers and the National Association of Fixed Annuities, disagreed with the CEJ's argument in comment letters submitted to the NAIC.
Jason Berkowitz, IRI's chief legal and regulatory affairs officer, said doubling the illustration time frame to 20 years would "create an unlevel playing field" among insurers. Further, while the proposal is intended to capture a more complete economic cycle to help consumers evaluate products, IRI sees "no evidence or data" suggesting the change would be helpful or outweigh market disruption.
Upping the illustration requirement "brings no additional client transparency, no additional disclosure, and no greater protection," said NAFA president and CEO Charles DiVencenzo.
All three groups suggest a time frame of 15 years rather than 10 if the NAIC does in fact amend the disclosure rules at all. The time frame for the NAIC's regulatory project is unclear.