Supporters of simplified disclosures for variable annuities may get a boost from a proposal that state insurance regulators will soon consider.
The National Association of Insurance Commissioner's life insurance and annuities committee is in coming weeks likely to approve a new working group that will consider updating model disclosure regulations for annuities. In its deliberations, the working group may include variable products as well as annuity "illustrations."
The current NAIC model disclosure regulation, adopted in 1999, applies only to fixed and individual annuities. It does not cover variable annuities and illustrations — information packets the life insurance industry often gives clients to show how much annuities and policies are likely to pay under different scenarios. They are often complicated documents.
"Because annuity sales have come under such scrutiny and there's been a lot of new regulation, like suitability regulation, we need to go back and look and see how the disclosure regulation is working in the current market," said James Mumford, first deputy commissioner in the Iowa Insurance Division in Des Moines, and the state's securities administrator. Mr. Mumford proposed establishing the new working group at the NAIC's summer meeting in late May and early June in San Francisco.
The NAIC is based in Kansas City, Mo.
New suitability regulations for variable annuities adopted by the
Financial Industry Regulatory Authority Inc. of New York and Washington took effect in May.
Illustrations should be considered as part of any deliberations over annuity disclosures because they are now widely used when selling variable as well as fixed annuities, Mr. Mumford said.
Including variable products could lead to adopting simplified disclosure documents that have been developed by the industry.
Last year, the National Association for Variable Annuities in Reston, Va., and the American Council of Life Insurers in Washington developed simplified disclosure documents for all types of annuities, including variable annuities. The industry has been seeking regulatory approval of the documents, which would be similar to the simplified "profile prospectus" that the Securities and Exchange Commission has proposed for mutual funds.
The annuity disclosures are being tested in Iowa on a pilot basis for fixed and indexed annuities. Written in plain English, they are two-page documents that describe essential features of annuity contracts, including information about insurance companies and broker-dealers selling the products.
Those simplified disclosures for variable annuities "could be used if the NAIC expands the disclosure model to variable annuities," said Michael DeGeorge, vice president and general counsel to NAVA, which represents the variable annuity industry.
Concerns have arisen among state regulators as the use of illustrations has increased for fixed annuities, said Kelly Ireland, counsel for regulation at the ACLI. "We think that's where the focus will be," she said.
"To the extent there are problems, we support standards that are working for [industry] members," Ms. Kelly said.
While not all members of the NAIC's life insurance and annuities committee have come out in favor of including variable products in deliberations over new model disclosure rules, some committee members clearly support the idea.
"I'm a fan of more disclosures, not less," said Thomas Sullivan, commissioner of the Connecticut Insurance Department in Hartford. He's sure there are others on the committee who agree, he said.
In terms of federal law, variable annuities are regulated as securities. Finra regulates variable annuity sales and it has rules governing what advertising materials can be given to prospective customers. But in terms of state law, variable annuities are considered insurance products in most locales.
"We're working with state insurance regulators to try to harmonize the rules regardless of which regulatory regime the annuity falls under so that investors, consumers, can expect an even level of protection," said Herb Perone, a spokesman for Finra.
"Insurance regulators and Finra need to cooperate," said Mr. Mumford, adding that they could "learn a lot from Finra" since Finra has been regulating suitability of broker sales for many years. However, "Finra just [regulates] broker-dealers," he said. "There are other distribution systems in insurance that Finra has no jurisdiction over at all."
Another reason that disclosures and illustrations used for variable products need to be looked at by state insurance regulators is that most variable products are now sold with guaranteed income provisions, Mr. Mumford said. That means that the risk is borne by the insurance company, not the investor, and insurance regulators need to regulate those sales, he said.
Not all insurance regulators are convinced that variable annuities should be included in deliberations over new disclosure rules. "It's still an open question whether they would include variable annuities along with fixed," said Sean Dilweg, Wisconsin insurance commissioner in Madison.
"You'd want to have Finra in and have conversations with them," he said. You'd hate to have one requirement on the insurance side and another on the securities side."
Regulations governing illustrations used for annuities will be a key issue for the insurance regulators. Currently, no model regulations exist for annuity illustrations, Mr. Mumford said.
"Companies are using illustrations to sell all types of annuities," he said. "Since there's no regulation, there's a potential for some of them to get a little out of hand." Iowa is currently analyzing illustrations used in that state to determine whether the earnings assumptions employed are reasonable.
"We want to make sure that when they provide illustrations, there's some basis and commonality between what's being provided," Mr. Dilweg said. "A lot of assumptions go into illustrations," he said."One minor change in a term can mean a huge difference in a payout 20 years down the road," he said.
E-mail Sara Hansard at [email protected].
