Regulators are worried that life insurers are taking advantage of vague variable annuity contract language and are doing something about it. Darla Mercado explains.
Regulators are starting to scrutinize provisions in variable annuity contracts that allow insurers to prohibit future contributions or make changes to how those contributions are invested.
The Securities and Exchange Commission is worried that life insurance companies are taking advantage of vague language in VA contracts to make substantial changes that could hurt investors. In some cases, clients have bought annuities under the impression that they would be allowed to make additional payments, only to find out several years later they could not.
“You see a moving target where the original prospectus might have had disclosures that say, 'We reserve the right to limit purchase payments,' and it might have been worded in a way that suggested [that the insurer] could reject something that was not in good order,” said William Kotapish, assistant director of the Office of Insurance Products at the SEC. “That's frustrating the reasonable expectations of the investor.”
'Consumers need to know'
The sentiment resonates with Julie Mix McPeak, Tennessee's insurance commissioner and head of the National Association of Insurance Commissioners' life insurance and annuities committee.
“I agree with the SEC's position that consumers need to know what the contract says and what can happen down the road,” she said. “We like to create options for consumers when a product needs to be revised for external pressures; we don't want someone to lose their coverage or be forced to stop making investments because of the terms of the product.”
Though these limits are becoming commonplace, much to the chagrin of brokers and their clients, the most recent development in contract amendments is proving to be the most controversial.
The Hartford Financial Services Group Inc., for example, recently began applying a series of new restrictions to existing contracts. The most controversial amendment places investment restrictions on existing account balances for a number of contracts. Certain clients with the Lifetime Income Builder rider will need to switch to a number of more conservative investments. Options include a menu of funds that call for a minimum 40% allocation to fixed income. Clients who don't respond by Oct. 4 could have their rider terminated.
How far can they go?
This particular change has raised questions among advisers and lawyers in the insurance industry on the extent to which insurance companies can push the boundaries of their contract language.
“It depends on the terms of the variable annuity and the discretion that the company has with respect to taking certain [investment] accounts out,” said Ralph D. Spaulding, a principal at Hinman Straub PC, who spent nearly 30 years as a regulator in the New York Insurance Department.
“Another issue is the ability for companies to change the fees and make it too costly to keep the benefit,” he added.
“Some companies have provisions to make those changes, but there's the question of how closely those changes are looked at by the insurance departments to make sure the charges don't go up unreasonably,” Mr. Spaulding said.
Hartford declined to make any executives available to be interviewed for this story. The company has communicated the changes to its clients and their advisers, according to spokesman David Collins.
As for Hartford, the carrier's domiciliary regulator spoke with the company and cleared the changes. Mary Ellen Breault, director of the Life and Health division at the Connecticut Insurance Department, said that in this case, the original filing for Hartford's annuity had provisions that permitted the insurer to make these changes.
“We see this as a reasonable period of time for clients to look over their materials and select other options,” Ms. Breault said of the Oct. 4 deadline. She added that initially there had been some concern over the fact that clients who don't respond could lose their rider, but that the regulator had discussed the issue with the company.
“We are looking at the correspondence that's going out, and making sure that they are following all the rules,” she added.
Legal experts anticipate that the comments by the SEC staff could pave the way for stronger disclosure requirements.
Joan E. Boros, who is of counsel at Jorden Burt LLP, said that in the future, insurers might have to spell out the circumstances in which they could require a change to funding and other terms.
The SEC “would provide standards for the full disclosure, but not the actual words,” she said. “If you say you can do this — for example, terminating purchase payments — then you need specific language on the terms and circumstances under which it can be done.”
