Insurance regulators seek stronger annuity disclosure

A group of state insurance regulators voted last week to adopt amendments to an annuity disclosure model that would give customers a detailed breakdown of product features.

Regulators in the National Association of Insurance Commissioners’ joint executive committee and plenary voted unanimously (with one abstention) to proceed with the amendments to the Annuity Disclosure Model Regulation, according to Jim Mumford, first deputy commissioner in Iowa’s insurance division.

Different from the NAIC’s annuity suitability rule, the annuity disclosure model rule would require that clients receive a buyer’s guide when purchasing an annuity.

Carriers also would have to include a disclosure form that described the contract, its benefits and how it worked. For fixed indexed annuities, the disclosure would have to show the basis for caps, spread and participation rates. Customers also would get an explanation of the impact of any riders, along with information on the contract’s federal tax status and the penalties that applied to withdrawals.

ILLUSTRATIONS

The most prominent amendment to the disclosure model reg, however, is the addition of standards for annuity illustrations, which are provided to the customer to show how the product has performed. For fixed indexed annuities, carriers would have to show how a given index performed over the previous 10 years, as well as the index’s best and worst historical performance over a decade.

The changes would make life a little easier for independent marketing organizations and broker-dealers that sold fixed indexed annuities. In the past, carriers haven’t had a standardized way of illustrating their policies, particularly those with living benefits, distributors noted.

The committee also adopted a bulletin to address the issue of stranger-originated annuities — the act of taking out an annuity on an ill person in the hope of making a short-term aggressive market play and cashing in on the person’s death benefits.

The bulletin is a memo to insurers, encouraging them to take on safeguards to limit their exposure to these transactions.

Regulators encourage insurers to review their charge-back policies and consider reserving the right to adjust brokers’ commissions if a death benefit is paid within the first policy year and the policy looks like a stranger-originated transaction. Insurance companies are also encouraged to create detection methods to identify and flag such sales and the brokers involved.

Email Darla Mercado at [email protected]