Life Insurance and Annuities (A) Committee Conference Call October 24, 2018
The Life Insurance and Annuities (A) Committee met via conference call March 12, 2018. The following Committee members participated: Doug Ommen, Chair, Lindsay Bates and Mike Yanacheak (IA), Jillian Froment, Vice Chair (OH); Jim L. Ridling represented by Richard Ford and Steven Ostlund (AL); Dave Jones represented by Ahmad Kamil (CA); Stephen C. Taylor and Philip Barlow (DC); Ralph T. Hudgens and Teresa Winer (GA); James J. Donelon (LA); Bruce R. Ramge (NE); Barbara D. Richardson represented by David Cassetty (NV); Maria T. Vullo represented by James Regalbuto (NY); Elizabeth Kelleher Dwyer represented by Matthew Gendron (RI); and Allan L. McVey represented by Joylynn Fix (WV). Also participating were: Michael Kakuk (MT); and Mike Boerner (TX).
1. Adopted its 2018 Summer National Meeting Minutes
Commissioner Hudgens made a motion, seconded by Director Froment, to adopt the Committee’s Aug. 5, minutes (see NAIC Proceedings – Summer 2018, Life Insurance and Annuities (A) Committee). The motion passed unanimously.
2. Adopted Model Law Review (A) Subgroup Recommendations
Mr. Kakuk said that the Model Law Review (A) Subgroup received a charge to work with the Life Actuarial (A) Task Force to review issues identified during the Subgroup’s completion of the Model Law Review Initiative. The Subgroup was charged with reviewing the Modified Guaranteed Annuity Model Regulation (#255) to research whether the requirements of Model #255 are contained elsewhere in state law or rules and consider whether there is a need for the development of a similar law for modified guaranteed annuities (MGAs) offered through general account (GA) products. The Subgroup was also charged with reviewing the Annuity Nonforfeiture Model Regulation (#806) to research whether the requirements of Model #806 are contained elsewhere in state law or rules and consider whether Model #806 may be more appropriate as an actuarial guideline.
Mr. Kakuk said that the Model Law Review (A) Subgroup worked with the Life Actuarial (A) Task Force, the NAIC Legal Division and the American Council of Life Insurers (ACLI) in accomplishing its charge. A memo outlining the Subgroup’s recommendations and rationale was distributed prior to the conference call (Attachment ?-A). Mr. Kakuk said the Subgroup concluded that: 1) there does not appear to be a need to revise Model #255 or develop a model to address MGAs offered through GA products; and 2) there does not appear to be a reason to retain Model #806 in its current form, but it would be useful to convert it to an actuarial guideline. Mr. Kakuk also requested that the Model Law Review (A) Subgroup be disbanded.
Birny Birnbaum (Center for Economic Justice—CEJ) said that he was concerned about the incorporation of laws by reference and questioned whether the process of turning a model into an actuarial guideline was replacing the legitimate role of the legislature by incorporating Model #806 into an actuarial guideline.
Mr. Kakuk said that the impetus for the Subgroup’s review of Model #806 was the low number of states that had adopted Model #806. He said the Subgroup’s research revealed that while states did not feel it was necessary to adopt Model #806, rather than simply archiving Model #806, there was agreement that there was value in retaining the substance of Model #806 in an actuarial guideline. Mr. Boerner said that the substance of Model #806 would become the actuarial guideline, a process that could be accomplished by the Life Actuarial (A) Task Force pursuant to an existing charge. Commissioner Ommen said that the incorporation by reference concern was something that the Committee takes seriously, and he said that he would consult with the NAIC Legal Division about application of this issue.
Director Ramge made a motion, seconded by Commissioner Hudgens, to adopt the recommendations of the Model Law Review (A) Subgroup and disband the Subgroup. The motion passed unanimously.
3. Adopted the 2019 GRET
Mr. Boerner said that the General Recognized Expense Table (GRET) is updated by the Society of Actuaries (SOA) every year and is adopted by the Committee and NAIC Membership. He said that the GRET is used in illustrations by 25%-28% of companies.
Attachment Life Insurance and Annuities (A) Committee
Mr. Cassetty made a motion, seconded by Commissioner Donelon, to adopt the 2019 GRET (see NAIC Proceedings – Fall 2018, Executive and Plenary Committee – Attachment ?). The motion passed unanimously.
4. Adopted 2019 Proposed Charges for the Life Actuarial (A) Task Force
Mr. Boerner explained that the Life Actuarial (A) Task Force updated its charges by re-ordering to make things more streamlined. He said that the more general charges are first, followed by the more specific charges.
Mr. Regalbuto asked whether the IUL Illustration (A) Subgroup was retained as New York has an issue with a company trying to circumvent the law and New York expects to make a referral to the Subgroup. Mr. Boerner confirmed that the Subgroup had been retained and is ready to receive the referral from New York.
Mr. Birnbaum asked whether the Life Actuarial (A) Task Force would be making any policy determinations within the context of the charge to “provide recommendations for guidance and requirements for accelerated underwriting, as needed.” Mr. Boerner said that the recommendations would be limited to issues involving reserving, mortality and solvency.
Director Ramge made a motion, seconded by Ms. Fix, to adopt the Life Actuarial (A) Task Force’s 2019 proposed charges (see NAIC Proceedings – Fall 2018, Executive and Plenary Committee – Attachment ?). The motion passed unanimously.
4. Adopted its 2019 Proposed Charges
Commissioner Ommen said that the only substantive difference in the Committee’s 2019 proposed charges from the 2018 charges was the removal of the Model Law Review (A) Subgroup, which completed its work.
Commissioner Donelon made a motion, seconded by Ms. Fix, to adopt the Committee’s 2019 proposed charges (see NAIC Proceedings – Fall 2018, Executive and Plenary Committee – Attachment ?). The motion passed unanimously.
5. Agreed to Discuss Universal Life Policies
Kim O’Brien (Americans for Asset Protection—AAP) said there is a growing problem with universal life insurance policies that is hitting the elderly particularly hard. Due to the low interest rate environment, policies purchased 10 and 20 years ago require additional premiums to stay in force, and the premium hikes are particularly difficult for the elderly to pay.
Commissioner Ommen said that he would put the issue on the agenda for a future meeting. He also said that the issue might be one for the Market Regulation and Consumer Affairs (D) Committee as well.
Having no further business, the Life Insurance and Annuities (A) Committee adjourned.
ANNUITY DISCLOSURE (A) WORKING GROUP November 2, 2018 / October 18, 2018 / October 5, 2018
Summary Report
The Annuity Disclosure (A) Working Group met via conference call Nov. 2, Oct. 18 and Oct. 5, 2018. During this meeting, the Working Group took the following action:
1. Continued to discuss revising the Annuity Disclosure Model Regulation (#245) to allow for the illustration of indexes thathave been in existence for less than 10 years, which is the remaining issue identified under its charge “to review and revise,as necessary, Section 6—Standards for Illustrations in the Annuity Disclosure Model Regulation (#245) to take into accountdisclosures necessary to inform consumers in light of the innovations in products currently in the marketplace.”
2. Agreed to have a small drafting group develop additional language for review and discussion by the Working Group.
3. Agreed to request an extension of the model law development request.
Annuity Disclosure (A) Working Group Conference Call
Nov 2, 2018
The Annuity Disclosure (A) Working Group of the Life Insurance and Annuities (A) Committee met via conference call Nov. 2, 2018. The following Working Group members participated: Mike Yanacheak, Chair (IA); Chris Struk (FL); Tate Flott and Julie Holmes (KS); Nour E. Benchaaboun (MD); John Robinson (MN); Matt Gendron and Sarah Neil (RI); and Doug Danzeiser (TX). Also participating were: Perry Kupferman (CA); Jason Lapham (CO); William Leung (MO); Robert E. Harkins (NE); Denise Lamy (NH); Jana Jarrett (OH); Tom Kilcoyne (PA); Travis Jordan (SD); James Young (VA); and Sue Ezalarab and Lauren Van Buren (WI).
1. Reviewed the Status of its Work
Mr. Yanacheak reminded the Working Group that it last met Oct. 18 via conference call. During that call, the Working Group decided to take a couple more weeks to consider language forwarded by the American Academy of Actuaries (Academy) and Mr. Robinson, to be ready for a final vote during this conference call.
2. Reviewed Comments on Draft Revisions to Model #245
Birny Birnbaum (Center for Economic Justice—CEJ) had submitted a comment letter in opposition to allowing the illustration of indexes that have been in existence for fewer than 10 years and proposing that the current 10-year limitation be increased to 20 years. The letter made six major points: 1) the current proposal is an invitation to data mine recent historical returns to create an index favorable for illustration, but which misrepresents the real risk-return situation for the consumer; 2) the proposal is contrary to the rationale underlying the participating income annuity revisions, which rely on longer-term averages—the exact opposite of the current proposal, which relies on short-term history as the basis for an illustration; 3) the discussions about the proposal reveal that the current 10-year limitation in the model is not long enough and should be changed to 20 years. He said the purpose of the 10-year limitation in the model is to prevent the use of illustrations based upon a short time frame that misrepresents the likely longer-term risk-return of the product. But, it is now clear that 10 years is too short a period of time to capture an economic cycle; 4) the consumer protections in the proposal will not empower or protect consumers from misleading illustrations and crediting rates; 5) the protection that an index algorithm is “not subject to discretion” does not provide protection when the investment algorithm incorporates machine learning and is designed to change quickly and often, without human involvement; and 6) the consumer disclosures do not foster consumer comprehension; they act only to shield insurers from potential liability.
Mr. Robinson asked if Mr. Birnbaum would have a problem with a new index made up of 50% Standard & Poor’s (S&P) 500 and 50% Barkley Bond Index—both of which have been around for a long time. Mr. Birnbaum said he would not have a problem with a company illustrating a new index made up of two existing indexes like Mr. Robinson described. He said however, that is different from an index made up of components, which is what is referenced in the draft revisions. Mr. Robinson agreed that illustrations are complex and cannot convey the complexity and nuance to every consumer. He said that even without an illustration, these new indexes are able to be sold. He asked Mr. Birnbaum whether he would prefer these products to be sold without an illustration. Mr. Birnbaum said they may be sold without an illustration, but consumers clearly prefer products that are sold with illustrations, and a key consumer protection is to prohibit the use of illustrations where they cannot help but be misleading. Mr. Birnbaum said that if each asset in an index were sold to a consumer directly, they would have to be sold by someone with a fiduciary duty to the customer. But once that asset becomes part of a fixed indexed annuity, there is no fiduciary duty to protect the consumer in that sale. Mr. Robinson said that he likes the idea that before illustrating, indexes should exist for 20 years (rather than the current 10). Mr. Gendron said that while an index made up of two indexes that have been in existence for more than 20 years may be acceptable, the issues arise when a non-public algorithm is used to allocate money between the two indexes based on the volatility of the market. He said that data mining can be used to come up with an algorithm that incorporates allocation switches that will illustrate most favorably.
Mr. Lapham said he is struggling with the fact that a product may be available but cannot be illustrated. He said he recognizes that with very complex products, consumers do not understand how they work and the illustrations end up serving as the de facto product. He said that the Working Group cannot fix the fact that consumers do not understand these products and, as a result, he is apprehensive to make the changes to the model.
Attachment Life Insurance and Annuities (A) Committee
Mr. Kilcoyne asked whether the Working Group had considered restricting the caps and participation rates that could be illustrated for indexes that have not been around for 10 years. Mr. Robinson said that other parts of the model address those kinds of safeguards. Mr. Kilcoyne said he is concerned with the fact that actions taken by investors contribute to the performance of indexes and that there is no way to incorporate that into a back-casted illustration. Mr. Danzeiser asked about the meaning of the term “component.” He said he is under the impression that these new indexes are not just combinations of other existing indexes, but could be made up of a combination of stocks, bonds, the price of gold or posted exchange rates. Beth Keith (Academy) confirmed that “component” is meant to be a broad term and includes more than just an index. Mr. Robinson said he would like for the Working Group to consider changing the proposal to allow for the illustration of indexes that have not be in existence for at least 10 years if: 1) the index is comprised entirely of components indexes that have been in existence for at least twenty (1020) calendar years; 2) the index value is calculated according to an algorithm that is not subject to discretion; and 3) if the insurance company is affiliated with the index provider, indexes published by that index provider are also used by entities unaffiliated with the insurance company. Otherwise, the index shall not be used to illustrate the account value. Mr. Robinson said he is concerned that the third condition in the proposal results in preventing anyone from being the first to use an index. Mr. Birnbaum said he read the provision as preventing the use of a proprietary index by requiring that the index also has to be used by entities outside the company or its affiliate. Mr. Yanacheak said that in order to keep working on revisions to this model, the Life Insurance and Annuities (A) Committee has to approve an extension of the Request for NAIC Model Law Development. He said he is planning to report the following to the Committee at the Fall National Meeting: 1) the Working Group has been struggling with revising Annuity Disclosure Model Regulation (#245) to allow for the illustration of indexes that have been in existence for less than 10 years for more than a year, and it has not been able to reach consensus; 2) however, on its last call, a few new issues were raised that the Working Group is interested in examining. A small drafting group agreed to develop additional language for review and discussion by the Working Group to see if after these additional refinements, the Working Group can come to a consensus; and 3) in light of this, the Working Group would like to ask the Committee for additional time to continue to work on revisions. The Working Group agreed to the plan and to meet via conference call following the Fall National Meeting to keep things moving forward. Having no further business, the Annuity Disclosure (A) Working Group adjourned. W:\National Meetings\2018\Summer\Cmte\A\ADWG\Annuity Disclosure WG confcall 10 -18-18 final.docx
Attachment Life Insurance and Annuities (A) Committee
Annuity Disclosure (A) Working Group Conference Call October 18, 2018
The Annuity Disclosure (A) Working Group of the Life Insurance and Annuities (A) Committee met via conference call Oct. 18, 2018. The following Working Group members participated: Mike Yanacheak, Chair (IA); Chris Struk (FL); Tate Flott and Julie Holmes (KS); Nour Benchaaboun (MD); John Robinson (MN); Matthew Gendron and Sarah Neil (RI); and Philip Reyna (TX). Also participating were: Jason Lapham (CO); Mary Mealer (MO); Robert E. Harkins (NE); and Jana Jarrett (OH).
1. Reviewed the Status of its Work
Mr. Yanacheak reminded the Working Group that it last met via conference call on Oct. 5. During that call the Working Group discussed the June 5 draft revisions to Annuity Disclosure Model Regulation (#245) addressing illustrating indexes that have been in existence less than 10 years that were exposed for a public comment period ending July 1. He said the American Academy of Actuaries (Academy) submitted comments that were posted on the Working Group’s web page. The Allianz Life Insurance Company of North America gave a slide presentation.
Mr. Yanacheak said that it was his intention to conclude discussions on revisions to Model #245.
2. Reviewed Academy Comments on Draft Revisions to Model #245
The Academy sent an email with the revisions discussed during the Oct. 5 conference call incorporated into the June 5 draft, which was distributed to the Working Group by email and posted on the Working Group’s web page. Beth Keith (Academy) summarized the Academy’s revisions. She explained that the Academy generally supports the revisions to Model #245, but she suggests a couple clarifying changes. First, the Academy suggests, instead of adding the following new language to 6F(9)(c) from the June 5 draft revisions:
If any index utilized in determination of an account value has been in existence for at least ten (10) calendar years but less than twenty (20) calendar years, the ten (10) calendar year periods that define the low and high scenarios shall be chosen from the exact number of years the index has been in existence. If any index utilized in determination of an account value has not been in existence for at least ten (10) calendar years, the ten (10) calendar year periods that define the most recent, high, and low scenarios shall be based on the historical performance of the components that have been in existence for at least ten (10) calendar years. If historical performance of the components exists for at least ten (10) calendar years but less than twenty (20) calendar years, the ten (10) calendar year periods that define the low and high scenarios shall be chosen from the exact number of years of historical performance of the components that are available.
The same intent could be accomplished with the following revision:
If any index utilized in determination of an account value has been in existence for at least ten (10) calendar years but less than twenty (20) calendar years, the ten (10) calendar year periods that define the low and high scenarios shall be chosen from the exact number of years the index (or all of its components) has been in existence.
Ms. Keith said that the Academy also proposed eliminating several of the disclosure requirements in Section 6F(9)(j) of the June 5 draft:
(j) If any index utilized in determination of an account value has not been in existence for at least ten (10)calendar years, the insurance company must provide on the first page of the illustration, in bolded fontor in a different color from the main text, all of the following disclosures that apply to the index:
(i) Notice that the index has existed for less than ten (10) calendar years. The notice must include thedate the index was created;
Attachment Life Insurance and Annuities (A) Committee
(ii) Notice that the index is made up of components that have each existed for at least ten (10) calendar years;
(iii) Notice that index values are based on an algorithm that does not change regardless of the situation;
(iv) Notice that the insurance company is not affiliated with the index provider, or if it is affiliated, that
indexes published by the index provider are used by entities unaffiliated with the insurance company;
(v) Notice that any estimates of how the index would have performed before its creation are hypothetical
and based on the past performance of the components in the index; and
(vi) Notice that future results will be different than the index’s past performance.
Ms. Keith said that the disclosures in (i) and (v) will help consumers understand the illustration, but the disclosures in (ii), (iii) and (iv) seem to demonstrate compliance with the regulation more than they facilitate consumer understanding. She also said the disclosure in (ii) is already covered in (i) and (v), and the disclosure in (vi) is already required in Section 6.G.(4)(b). By removing (ii), (iii), (iv) and (vi), the information in (i) and (v) can be communicated in a clear and concise manner. Birny Birnbaum (Center for Economic Justice—CEJ) asked whether the Academy had evidence that a consumer’s understanding would not be enhanced by the disclosures. Ms. Keith said that the recommendations are based on company experiences, noting that consumers do not ask about algorithms. Mr. Gendron asked Ms. Keith what a company would do if a consumer were to ask about an algorithm that is proprietary. Ms. Keith said that the company would describe things generally. Mr. Robinson said that he had some concerns about the June 5 revisions. He said that he was concerned about the phrases “has been in existence” and “has not been in existence.” He suggested that rather than “existence,” the criterion should be that the index is publicly available or a combination of indices that are publicly available. He said that if “existence” is replaced, there is no need for the third criterion in Section 6.F.9(b)—that at least one other “entity” has used the index. He explained that this requirement means that no insurance entity could be the first to use such an index, which is an untended consequence of the language. Mr. Robinson further explained that the third criterion was added out of concern that an index could be constructed from non-verifiable components. He suggested solving that problem by replacing “existence” with “public availability,” which would make the third criterion unnecessary. Mr, Robinson suggested that there might need to be criteria concerning “publicly available,” such as published in a well-known publication or published for at least 10 years. Mr. Holman reiterated his concern that consumers will not understand these volatility-controlled indexes, and the changes suggested by Mr. Robinson do not address this concern. He said that the problem is that the nondiscretionary algorithms are not transparent. He said that he has a problem when it is impossible for a consumer to independently verify what he is told. Mr. Birnbaum asked the Working Group to consider voting the proposed revisions down. He said that it is too easy to manipulate the index composition to create a favorable illustration. He said, just like was seen with universal life products, the illustrations defy the traditional risk-return relationship and present consumers with misleading illustrations and crediting rates. He said that even if the algorithm used is nondiscretionary, it is designed to change quickly and often. He said that disclosures, no matter the font size or color, do not help when there is an illustration. He said that the disclosures become a liability shield to insurers and provide no understanding to consumers. The consumers rely on the illustration and there is no way to educate the consumer on this product. The product design is driven by the illustration. The illustration shows the promise of a bigger return with less risk and it ends up being too good to be true. He questioned why state regulators that are trying to address unrealistic illustrations of indexed universal life (IUL) policies would open another door for potential gaming and unrealistic illustrations with indexed annuities. Mr. Robinson asked Mr. Birnbaum if he was opposed to the sale of products with indexes in existence for fewer than 10 years, or just to them being illustrated. Mr. Birnbaum said that companies are less likely to sell these products where they cannot be illustrated. Mr. Yanacheak said that there are products for sale in Iowa, but they are unable to be illustrated. Mr. Holman said that he did not believe the disclosure issue was fixable and Rhode Island would not be able to vote in favor of the proposed revisions. Mr. Reyna and Mr. Marrow said that they would like additional time to consider Mr. Robinson’s proposed revisions.
Attachment Life Insurance and Annuities (A) Committee
Mr. Yanacheak asked the Working Group members to be ready for a final vote during the next conference call to resolve the charge. The Working Group planned to meet via conference call in the next two weeks. Having no further business, the Annuity Disclosure (A) Working Group adjourned. W:\National Meetings\2018\Summer\Cmte\A\ADWG\Annuity Disclosure WG confcall 10 -18-18 final.docx
Attachment Life Insurance and Annuities (A) Committee
Annuity Disclosure (A) Working Group Conference Call October 5, 2018
The Annuity Disclosure (A) Working Group of the Life Insurance and Annuities (A) Committee met via conference call Oct. 5, 2018. The following Working Group members participated: Mike Yanacheak, Chair (IA); Chris Struk (FL); Tate Flott and Julie Holmes (KS); Nour Benchaaboun (MD); John Robinson (MN); Matthew Gendron and Sarah Neil (RI); and Philip Reyna (TX). Also participating were: Jason Lapham (CO); Mary Mealer (MO); Robert E. Harkins (NE); and Jana Jarrett (OH).
1. Reviewed the Status of its Work
Mr. Yanacheak reminded the Working Group of its charge to review and revise, as necessary, Section 6—Standards for Illustrations in the Annuity Disclosure Model Regulation (#245) to take into account disclosures necessary to inform consumers in light of the innovations in products currently in the marketplace.
He said the Request for NAIC Model Law Development “to revise Section 6—Standards for Illustrations in the Annuity Disclosure Model Regulation (#245) to address issues identified by the Working Group related to innovations of annuity products currently in the marketplace that are not addressed or addressed adequately in the current standards” was adopted by the Executive (EX) Committee and Plenary at the 2017 Summer National Meeting.
Mr. Yanacheak reminded the Working Group that two issues have been identified: 1) under the model, there is no way to illustrate indexes on fixed indexed annuities that have not been in existence for the previous 10 years; and 2) the definition of “non-guaranteed elements” could be construed to include participating income annuities because of the formula used to calculate the dividend scale.
Mr. Yanacheak reminded the Working Group that the Life Insurance and Annuities (A) Committee already adopted revisions to Model #245 addressing the issue of illustrating participating income annuities, as recommended by this Working Group. The June 5 draft revisions to Model #245 addressing illustrating indexes that have been in existence less than 10 years were exposed for a public comment period ending July 1. The American Academy of Actuaries (Academy) submitted comments that were posted on the Working Group’s web page. Allianz Life Insurance Company of North America submitted a slide presentation for discussion on today’s call.
2. Reviewed Academy Comments on June 5 Draft Revisions to Model #245
Beth Keith (Academy) summarized the Academy’s comment letter on the June 5 draft revisions to Model #245. She explained that the Academy generally supports the revisions to Model #245, but suggests a couple clarifying changes. First, the Academy suggests, instead of adding the following new language to 6F(9)(c) from the June 5 draft revisions:
If any index utilized in determination of an account value has been in existence for at least ten (10) calendar years but less than twenty (20) calendar years, the ten (10) calendar year periods that define the low and high scenarios shall be chosen from the exact number of years the index has been in existence. If any index utilized in determination of an account value has not been in existence for at least ten (10) calendar years, the ten (10) calendar year periods that define the most recent, high, and low scenarios shall be based on the historical performance of the components that have been in existence for at least ten (10) calendar years. If historical performance of the components exists for at least ten (10) calendar years but less than twenty (20) calendar years, the ten (10) calendar year periods that define the low and high scenarios shall be chosen from the exact number of years of historical performance of the components that are available;
The same intent could be accomplished with the following revision:
If any index utilized in determination of an account value has been in existence for at least ten (10) calendar years but less than twenty (20) calendar years, the ten (10) calendar year periods that define the low and high scenarios shall be chosen from the exact number of years the index (or all of its components) has been in existence.
Attachment Life Insurance and Annuities (A) Committee
Ms. Keith said the Academy also proposed eliminating several of the disclosure requirements that were added in Section 6F(9)(j) of the June 5 draft.
(j) If any index utilized in determination of an account value has not been in existence for at least ten (10) calendar years, the insurance company must provide on the first page of the illustration, in bolded font or in a different color from the main text, all of the following disclosures that apply to the index: (i) Notice that the index has existed for less than ten (10) calendar years. The notice must include the
date the index was created;
(ii) Notice that the index is made up of components that have each existed for at least ten (10) calendar years;
(iii) Notice that index values are based on an algorithm that does not change regardless of the situation;
(iv) Notice that the insurance company is not affiliated with the index provider, or if it is affiliated, that
indexes published by the index provider are used by entities unaffiliated with the insurance company;
(v) Notice that any estimates of how the index would have performed before its creation are hypothetical
and based on the past performance of the components in the index; and
(vi) Notice that future results will be different than the index’s past performance.
Ms. Keith said the disclosures in (i) and (v) will help consumers understand the illustration, but the disclosures in (ii), (iii) and (iv) seem to demonstrate compliance with the regulation more than they facilitate consumer understanding. She also said the disclosure in (ii) is already covered in (i) and (v), and the disclosure in (vi) is already required in Section 6.G.(4)(b). By removing (ii), (iii), (iv) and (vi), the information in (i) and (v) can be communicated in a clear and concise manner. Mr. Birnbaum asked whether the Academy had evidence that a consumer’s understanding would not be enhanced by the disclosures. Ms. Keith said the recommendations are based on company experiences, noting that consumers do not ask about algorithms, for example. Mr. Gendron asked Ms. Keith what a company would do if a consumer were to ask about an algorithm that is proprietary. She said the company would describe things generally. Brendan Sheehan (Allianz) gave a brief presentation on volatility-controlled indexes (VCIs), which are what is being described in the model revisions, as indexes that have been in existence for fewer than 10 years. He explained that VCIs are prevalent in the marketplace; every top 10 fixed index annuity carrier offers at least one VCI, with more than 45 unique VCIs in the marketplace. He explained that VCIs are indexes comprised of two or more components that are combined using a weighting algorithm. He said companies began offering VCIs in 2012 in response to a historically low interest rate environment. Insurers were earning less on their investments, so they had less to spend on index options. This resulted in lower index parameters (e.g., caps), which decreased the interest potential for consumers. Insurers wanted to provide more value to consumers. VCIs have lower volatility than traditional equity indexes, which reduces option costs. This enables carriers to offer higher index parameters (e.g., caps), which increases the interest potential for consumers. Mr. Sheehan said experience has shown that illustrations impact consumer decision-making. Consumers make different decisions based on the information they see in the illustration. He said data shows that illustrations are a powerful tool in educating consumers on their choices, and consumers will not buy what is not illustrated as often. Mr. Sheehan explained, for indexes with less than 10 years of existence, such as a VCI, the current proposal requires that: 1) the index components must have at least 10 years of history (a 10+ year history reflects different market environments); 2) there is no discretion in the weighting algorithm (therefore, the mechanics underlying future credits are consistent with the illustration); 3) the index must be published by a reputable index provider, which provides an additional safeguard for consumers; and 4) consumer disclosures must include the index inception date, a statement that pre-inception performance is hypothetical and a statement that the illustration does not predict future performance. Mr. Sheehan said unless these requirements are met, an index cannot be illustrated.
Attachment Life Insurance and Annuities (A) Committee
Mr. Gendron asked where the “reputable index provider” requirement is located in the proposal. Mr. Sheehan said Section 6F(9)(j)(iv) requires notice that the insurance company is not affiliated with the index provider, or, if it is affiliated, that indexes published by the index provider are used by entities unaffiliated with the insurance company.
Mr. Sheehan clarified that in the case of a VCI that has not been in existence for 10 years but has components that have been in existence for 15 years, three hypothetical indexes would be created under the June 5 draft: 1) showing the most recent 10 years; 2) showing the best 10 years; and 3) showing the worst 10 years.
Mr. Birnbaum asked a number of questions designed to understand how VICs are able to overcome the standard rules of economics regarding risk and return and create a situation where higher returns are realized by investing in a lower risk product. Mr. Sheehan clarified that there is the potential to earn higher returns than through fixed indexed equities alone because the inclusion of the lower risk bonds and cash alternatives in the VIC allow the insurer to set higher caps.
Adam Politzer (Athene) further clarified that VICs operate under the same theory as portfolio risk to allow for the potential for a higher rate of return per unit of risk.
Mr. Robinson said he has lingering concerns with the proposal. He said he is concerned with some of the terms used in the model, such as “in existence,” “inception date” and “published.” He said he would summarize his concerns and circulate them to the Working Group. Mr. Sheehan said “inception date” is a term of art indicating the date an index goes public.
Mr. Gendron said Rhode Island is not likely to support the revisions because it does not appear that the changes to the model would make the product understandable to consumers. He said he has seen illustrations that comply with the proposed revisions, but they are not understandable. He said this is all the more significant because illustrations impact consumer choice and make it more likely consumers will purchase, but without a true understanding. Mr. Struk agreed with Mr. Gendron and said Florida has the same concerns.
Mr. Yanacheak encouraged Working Group members to resolve any lingering questions, with a plan to meet via conference call within the next two weeks to resolve the charge one way or another.
Having no further business, the Annuity Disclosure (A) Working Group adjourned.
W:\National Meetings\2018\Fall\Cmte\A\ADWG\Annuity Disclosure WG confcall 10-5-18 final.docx
2018 Fall National Meeting San Francisco, California
ANNUITY SUITABILITY (A) WORKING GROUP Thursday, November 15, 2018
9:00 – 10:00 a.m.
Meeting Summary Report
The Annuity Suitability (A) Working Group met Nov. 15, 2018. During this meeting, the Working Group:
1. Adopted its Summer National Meeting minutes.
2. Adopted its Oct. 22 and Oct. 23, minutes, which included the following action:a. Completed its review of the comments received on suggested revisions to the Suitability in Annuity Transactions
Model Regulation (#275).b. Developed an initial draft of proposed revisions to Model #275 for comment.
3. Discussed draft revisions to Model #275 and adopted the following: 1) several “clean-up” amendments to Section 5 andSection 6. In Section 5, amendments were made to the definitions for “cash compensation;” “intermediary;” and“recommendation.” In Section 6, language in Section 6B(3) was deleted, and two new paragraphs were added in Section6D; and 2) a drafting note explaining why the NAIC’s current draft of Model #275 does not include the term “best interest”that is used in the U.S. Securities and Exchange Commission’s (SEC) April 2018 “best interest” proposal. The WorkingGroup chair will report to the Life Insurance and Annuities (A) Committee what the Working Group has done thus far indrafting these amendments, explaining the work that remains and recommending that the Committee expose thepreliminary draft, including the amendments made today, for a public comment period.
Comments are being requested on this draft. The revisions to this draft reflect changes made from the existing model. Comments should be sent only by email to Jolie Matthews at [email protected].
SUITABILITY IN ANNUITY TRANSACTIONS MODEL REGULATION
A. The purpose of this regulation is to require insurers to establish a system to supervise recommendations andto set forth standards and procedures for recommendations to consumers that are suitable, in the consumer’sinterest and result in transactions involving annuity products so that the insurance needs and financialobjectives of consumers at the time of the transaction are appropriately addressed.
B. Nothing herein shall be construed to create or imply a private cause of action for a violation of this regulation.
Drafting Note: The NAIC acknowledges that the goal of the U.S. Securities and Exchange Commission’s (SEC) April 2018 proposals is to move toward a harmonized best interest standard of conduct for broker-dealers and agents that substantially raises the professional obligations for recommendations, while preserving and differentiating the fiduciary standard for investment advisers. As of the November 2018 Draft of the amended Suitability in Annuity Transactions Model Regulation (#275), the SEC’s proposed use of the term “best interest” in the actual text of the SEC’s Regulation Best Interest proposal appears to describe “best interest” as including “best interest” without further definition and is not distinguished from the investment adviser fiduciary. The SEC has received many public comments on use of the phrase “best interest” and may provide greater clarity in its final rule. While the NAIC fully supports a similar goal of a harmonized standard of conduct, and has a strong preference to remain consistent with FINRA rules in connection with a recommendation of variable annuities, the NAIC is not yet convinced that this November 2018 Draft of the amended Suitability in Annuity Transactions Model Regulation (#275) is legally distinct from the enhanced standards that are intended by the SEC. Until such time the NAIC can evaluate any distinction in the text of the SEC proposal between a “best interest” recommendation and investment adviser fiduciary duties, and the SEC and FINRA have finalized relevant terms, definitions and related requirements, the NAIC would opt to refrain from using the phrase “best interest” in Section 6A(1) of the proposed modifications to the Suitability in Annuity Transactions Model Regulation (#275).
Drafting Note: The language of subsection B comes from the NAIC Unfair Trade Practices Act. If a State has adopted different language, it should be substituted for subsection B.
Drafting Note: Section 989J of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) specifically refers to this model regulation as the “Suitability in Annuity Transactions Model Regulation.” Section 989J of the Dodd-Frank Act confirmed this exemption of certain annuities from the Securities Act of 1933 and confirmed state regulatory authority. This regulation is a successor regulation that exceeds the requirements of the 2010 model regulation.
Section 2. Scope This regulation shall apply to any sale or recommendation to purchase, exchange or replaceof an annuity made to a consumer by an insurance producer, or an insurer where no producer is involved, that results in the purchase, exchange or replacement recommended. Section 3. Authority This regulation is issued under the authority of [insert reference to enabling legislation]. Drafting Note: States may wish to use the Unfair Trade Practices Act as enabling legislation or may pass a law with specific authority to adopt this regulation. Section 4. Exemptions
Unless otherwise specifically included, this regulation shall not apply to transactions involving:
A. Direct response solicitations where there is no recommendation based on information collected from the consumer pursuant to this regulation;
B. ContractsAnnuities that are not individually solicited and are used to fund:
(1) An employee pension or welfare benefit plan that is covered by the Employee Retirement and Income Security Act (ERISA);
(2) A plan described by sections 401(a), 401(k), 403(b), 408(k) or 408(p) of the Internal Revenue Code
(IRC), as amended, if established or maintained by an employer;
(3) A government or church plan defined in section 414 of the IRC, a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax-exempt organization under section 457 of the IRC; or
(4) A nonqualified deferred compensation arrangement established or maintained by an employer or
plan sponsor;
C.(5) Settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process; or
D.(6) Formal prepaid funeral contracts.
Section 5. Definitions
A. “Annuity” means an annuity that is an insurance product under State law that is individually solicited, whether the product is classified as an individual or group annuity.
B. “Cash compensation” means any discount, concession, fee, service fee, commission, sales charge, loan,
override, or cash benefit, or other remuneration received by producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from the consumer.
C. “Consumer” means the owner or prospective owner of an annuity contract.
D. “Consumer profile information” means information that is reasonably appropriate to determine whether a
recommendation is in furtherance of the consumer’s interests, including the following:
(3) Financial situation and needs, including debts and other obligations;
(4) Financial experience;
(5) Financial objectives;
(6) Intended use of the annuity;
(7) Financial time horizon;
(8) Existing assets or financial products, including investment, annuity and insurance holdings;
(9) Liquidity needs;
(10) Liquid net worth;
(11) Risk tolerance, including willingness to accept non-guaranteed elements in the annuity, including variability in premium, death benefit or fees;
(12) Financial resources used to fund the annuity; and
(13) Tax status.
BE. “Continuing education credit” or “CE credit” means one continuing education credit as defined in [insert
reference in State law or regulations governing producer continuing education course approval]. CF. “Continuing education provider” or “CE provider” means an individual or entity that is approved to offer
continuing education courses pursuant to [insert reference in State law or regulations governing producer continuing education course approval].
DG. “FINRA” means the Financial Industry Regulatory Authority or a succeeding agency. EH. “Insurer” means a company required to be licensed under the laws of this state to provide insurance products,
including annuities. FI. “Insurance producer” or “producer” means a person or entity required to be licensed under the laws of this
state to sell, solicit or negotiate insurance, including annuities. J. “Intermediary” means an entity contracted directly with an insurer or with another entity contracted with an
insurer intermediary to facilitate the sale of the insurer’s annuities by producers.
K. “Material conflict of interest” means a financial interest of the producer, or the insurer where no producer is involved, in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation.
L. “Non-cash compensation” means any form of compensation that is not cash compensation, including, but not
limited to, merchandise, gifts, tickets to paid events, prizes, travel expenses or meals and lodging. GM. “Recommendation” means individualized advice provided by an insurance a producer, or an insurer where
no producer is involved, to an individual consumer that results in a purchase, an exchange or a replacement of an annuity in accordance with that advice. Recommendation does not include general communication to the public, generalized customer services assistance or administrative support, general educational information and tools, prospectuses, or other product and sales material.
HN. “Replacement” means a transaction in which a new policy or contract is to be purchased, and it is known or
should be known to the proposing producer, or to the proposing insurer if there is nowhether or not a producer
is involved, that by reason of the transaction, an existing policy or contract has been or is to be any of the following:
(1) Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing insurer or otherwise
terminated;
(2) Converted to reduced paid-up insurance, continued as extended term insurance, or otherwise reduced in value by the use of nonforfeiture benefits or other policy values;
(3) Amended so as to effect either a reduction in benefits or in the term for which coverage would
otherwise remain in force or for which benefits would be paid;
(4) Reissued with any reduction in cash value; or (5) Used in a financed purchase.
Drafting Note: The definition of “replacement” above is derived from the NAIC Life Insurance and Annuities Replacement Model Regulation. If a State has a different definition for “replacement,” the State should either insert the text of that definition in place of the definition above or modify the definition above to provide a cross-reference to the definition of “replacement” that is in State law or regulation.
I. “Suitability information” means information that is reasonably appropriate to determine the suitability of a
recommendation, including the following: (1) Age;
(2) Annual income;
(3) Financial situation and needs, including the financial resources used for the funding of the annuity;
(4) Financial experience; (5) Financial objectives; (6) Intended use of the annuity; (7) Financial time horizon;
(8) Existing assets, including investment and life insurance holdings;
(9) Liquidity needs;
(10) Liquid net worth;
(11) Risk tolerance; and
(12) Tax status. O. “Suitable” means a recommendation of an annuity that is consistent with the consumer’s insurance needs and
financial objectives based upon the facts disclosed by the consumer or known at the time of the recommendation by the producer, or insurer where no producer is involved.
Section 6. Duties of Insurers and of Insurance Producers A. (1) A producer, or an insurer where no producer is involved, when making a recommendation of an
annuity, shall act in the interests of the consumer at the time the recommendation is made, without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interests.
(2) A producer or insurer complies with paragraph (1) by:
(a) Acting with reasonable diligence, care, skill and prudence; (b) Making suitable recommendations in accordance with subsection B; and (c) Making disclosures and acting in accordance with subsections C, D, E, F and H.
A. In recommending to a consumer the purchase of an annuity or the exchange of an annuity that results in
another insurance transaction or series of insurance transactions, the insurance producer, or the insurer where no producer is involved, shall have reasonable grounds for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer as to his or her investments and other insurance products and as to his or her financial situation and needs, including the consumer’s suitability information, and that there is a reasonable basis to believe all of the following:
NOTE TO THE WORKING GROUP: DURING DISCUSSIONS OF REVISIONS, THE WORKING GROUP WANTED TO RETAIN THE ITALIZED LANGUAGE IN PROPOSED PARAGRAPHS (3) AND (4) BELOW FOR CONSIDERATION AND DISCUSSION AT A LATER DATE.
(3) The requirements under this section do not mean the annuity product with the lowest one-time or
multiple occurrence compensation structure shall necessarily be recommended, but the recommendation shall be diligently focused on whether the product costs, rates, benefits, features and other contractual provisions of the annuity address the actual financial situation, objectives and needs of the particular consumer.
(4) (a) The producer, or insurer where no producer is involved, shall consider all factors,
including the consumer’s consumer profile information, product costs rates, benefits, features and other contractual provisions.
(b) The factors to be considered are those factors generally relevant in making a suitability
determination, but the level of importance of each factor may vary depending on the facts and circumstances of a particular case. However, each factor shall not be considered in isolation.
B. Prior to the recommendation of an annuity, a producer, or an insurer where no producer is involved, shall: (1) Make reasonable efforts to obtain consumer profile information from the consumer; (2) Consider the types of products the producer, or insurer where no producer is involved, is authorized
and licensed to recommend or sell that may align with the consumer’s disclosed consumer profile information and address the consumer’s financial situation, objectives and needs; and
(3) In recommending to a consumer the purchase of an annuity or the exchange of an annuity that results
in another insurance transaction or series of insurance transactions, hHave reasonable grounds for believing the recommendation is suitable for the particular consumer.
C. Prior to or at the time of the recommendation or sale of an annuity, the producer, or insurer where no producer
is involved, shall prominently disclose to the consumer: (1) A description of the scope and terms of the relationship with the consumer and the role of the
producer in the transaction; (2) Disclose to the consumer any limitations the producer or the insurer has in regard to the following: (a) The type of products that the producer is authorized and licensed to recommend or sell;
and (b) Whether only specific insurer company products or a limited range of annuity products
(3) (a) A description of the sources and types of cash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary or other producer or by fee as a result of a contract for advice or consulting services or fee.
(b) To satisfy subparagraph (a) of this paragraph, the producer shall disclose: (i) A reasonable estimate of the amount of cash compensation, which may be stated
as a range of amounts or percentages; and (ii) Whether the cash compensation is a one-time or multiple occurrence amount, and
if a multiple occurrence amount, the frequency and amount of the occurrence, which may be stated as a range of amounts or percentages;
(4) The type of non-cash compensation that exceeds $500 per producer per year the producer may
receive from an insurer or intermediary that is connected to the sale of the annuity; and (5) Any and all material conflicts of interest.
D. (1) In making a recommendation the producer, or insurer where no producer is involved, shall at the
time of the recommendation have a reasonable basis to believe all of the following:
(a1) The consumer has been reasonably informed of various features of the annuity, such as the potential surrender period and surrender charge, potential tax penalty if the consumer sells, exchanges, surrenders or annuitizes the annuity, mortality and expense fees, investment advisory fees, potential charges for and features of riders, limitations on interest returns, potential changes in non-guaranteed elements of the annuity, insurance and investment components and market risk;
Drafting Note: If a State has adopted the NAIC Annuity Disclosure Model Regulation, the State should insert an additional phrase in subparagraph (1a) above to explain that the requirements of this section are intended to supplement and not replace the disclosure requirements of the NAIC Annuity Disclosure Model Regulation.
(b2) The consumer would benefit from certain features of the annuity, such as tax-deferred growth, annuitization or death or living benefit;
(c3) The particular annuity as a whole, the underlying subaccounts to which funds are allocated
at the time of purchase or exchange of the annuity, and riders and similar product enhancements, if any, are suitable (and in the case of an exchange or replacement, the transaction as a whole is suitable) for the particular consumer based on his or her suitability information; and
(d4) In the case of an exchange or replacement of an annuity, the exchange or replacement is
suitable including taking into consideration whether:
(ia) The consumer will incur a surrender charge, be subject to the commencement of a new surrender period, lose existing benefits (such as death, living or other contractual benefits), or be subject to increased fees, investment advisory fees or charges for riders and similar product enhancements;
(iib) The consumer would benefit from product enhancements and
improvementsreplacing product will provide a substantial benefit to the consumer in comparison to the replaced product over the life of the product; and
(iiic) The consumer has had another annuity exchange or replacement and, in particular,
an exchange or replacement within the preceding 3660 months.
B. Prior to the execution of a purchase, exchange or replacement of an annuity resulting from a recommendation, an insurance producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain the consumer’s suitability information. (2) The requirements under this section do not mean the annuity with the lowest one-time or multiple
occurrence compensation structure shall necessarily be recommended, but the recommendation shall be diligently focused on whether the product costs, rates, benefits, features and other contractual provisions of the annuity are consistent with the actual financial situation, objectives and needs of the particular consumer.
(3) The consumer profile information and product costs, rates, benefits and features to be considered
are those factors generally relevant in making a suitability determination, but the level of importance of each factor may vary depending on the facts and circumstances of a particular case. However, each factor shall not be considered in isolation.
CE. Except as permitted under subsection DF, an insurer shall not issue an annuity recommended to a consumer
unless there is a reasonable basis to believe the annuity is suitable based on the consumer’s suitabilityconsumer profile information.
DF. (1) Except as provided under paragraph (2) of this subsection, neither an insuranceA producer, nor an
insurer, shall have any obligation to a consumer under subsections A or CE related to any annuity transaction if:
(a) No recommendation is made;
(b) A recommendation was made and was later found to have been prepared based on materially inaccurate information provided by the consumer;
(c) A consumer refuses to provide relevant suitabilityconsumer profile information and the annuity transaction is not recommended; or
(d) A consumer decides to enter into an annuity transaction that is not based on a
recommendation of the insurer or the insurance producer. (2) An insurer’s issuance of an annuity subject to paragraph (1) shall be reasonable under all the
circumstances actually known to the insurer at the time the annuity is issued. E.G An insuranceA producer or, insurer where no insurance producer is involved, the responsible insurer
representative, shall at the time of recommendation or sale: (1) Make a written record of any recommendation and the grounds for the recommendation subject to
section 6A of this regulation; (2) Orally, or in writing, describe to the consumer the basis or bases of the recommendation; (2)(3) Obtain a customer signed statement documenting a customer’s refusal to provide suitabilitythe
consumer profile information, if any; and (3)(4) Obtain a customer signed statement acknowledging that an annuity transaction is not recommended
if a customer decides to enter into an annuity transaction that is not based on the insurance producer’s or insurer’s recommendation.
FH. (1) An insurer shall establish a supervision system that is reasonably designed to achieve the insurer’s
and its insurance producers’ compliance with this regulation, including, but not limited to, the following:
(a) The insurer shall maintain reasonable procedures to inform its insurance producers of the
requirements of this regulation and shall incorporate the requirements of this regulation into relevant insurance producer training manuals;
(b) The insurer shall establish standards for insurance producer product training and shall
maintain reasonable procedures to require its insurance producers to comply with the requirements of section 7 of this regulation;
(c) The insurer shall provide product-specific training and training materials which explain all
material features of its annuity products to its insurance producers;
(d) The insurer shall maintain procedures for review of each recommendation prior to issuance of an annuity that are designed to ensure that there is a reasonable basis to determine that a recommendation is suitable. Such review procedures may apply a screening system for the purpose of identifying selected transactions for additional review and may be accomplished electronically or through other means including, but not limited to, physical review. Such an electronic or other system may be designed to require additional review only of those transactions identified for additional review by the selection criteria;
(e) The insurer shall maintain reasonable procedures to detect recommendations that are not
suitable. This may include, but is not limited to, confirmation of the consumer’s suitabilityconsumer profile information, systematic customer surveys, interviews, confirmation letters and programs of internal monitoring. Nothing in this subparagraph prevents an insurer from complying with this subparagraph by applying sampling procedures, or by confirming the suitabilityconsumer profile information after issuance or delivery of the annuity; and
(f) The insurer shall maintain reasonable procedures to assess, prior to or upon issuance or
delivery of an annuity, whether a producer has provided to the consumer the information required to be provided under this section; and
(f)(g) The insurer shall annually provide a report to senior management, including to the senior
manager responsible for audit functions, which details a review, with appropriate testing, reasonably designed to determine the effectiveness of the supervision system, the exceptions found, and corrective action taken or recommended, if any.
(2) (a) Nothing in this subsection restricts an insurer from contracting for performance of a
function (including maintenance of procedures) required under paragraph (1). An insurer is responsible for taking appropriate corrective action and may be subject to sanctions and penalties pursuant to section 8 of this regulation regardless of whether the insurer contracts for performance of a function and regardless of the insurer’s compliance with subparagraph (b) of this paragraph.
(b) An insurer’s supervision system under paragraph (1) shall include supervision of
contractual performance under this subsection. This includes, but is not limited to, the following:
(i) Monitoring and, as appropriate, conducting audits to assure that the contracted
function is properly performed; and (ii) Annually obtaining a certification from a senior manager who has responsibility
for the contracted function that the manager has a reasonable basis to represent, and does represent, that the function is properly performed.
(3) An insurer is not required to include in its system of supervision an insurancea producer’s
recommendations to consumers of products other than the annuities offered by the insurer.
GI. Neither a producer nor an insurer shall An insurance producer shall not dissuade, or attempt to dissuade, a consumer from:
(1) Truthfully responding to an insurer’s request for confirmation of the suitabilityconsumer profile
(2) Filing a complaint; or (3) Cooperating with the investigation of a complaint.
HJ. (1) Sales made in compliance with FINRA requirementsrules pertaining to suitability and supervision
of annuity transactions shall satisfy the requirements under this regulation. This subsection applies to FINRA broker-dealer sales of annuities if in connection with the sale of an annuity, the broker-dealer and the producer, who also is appropriately registered as a representative with FINRA, have complied with the business rules, controls and procedures at least as effective as those required under this regulation the suitability and supervision is similar to those applied to variable annuity sales. However, nothing in this subsection shall limit the insurance commissioner’s ability to investigate and enforce (including investigate) the provisions of this regulation.
Drafting Note: Non-compliance with FINRA requirements means that the broker-dealer transaction is subject to compliance with the suitability requirements of this regulation. (2) For paragraph (1) to apply, an insurer shall: (a) Monitor the FINRA member broker-dealer using information collected in the normal
course of an insurer’s business; and
(b) Provide to the FINRA member broker-dealer information and reports that are reasonably appropriate to assist the FINRA member broker-dealer to maintain its supervision system.
NOTE TO WORKING GROUP: THE WORKING GROUP DISCUSSED THE ITALIZED LANGUAGE BELOW SUGGESTED BY NEW YORK DURING ITS OCTOBER INTERIM MEETING, BUT DEFERRED ADDING THE LANGUAGE AS AN OFFICIAL PROVISION IN THE DRAFT REVISIONS UNTIL IT COULD DISCUSS FURTHER. K. Any requirement applicable to a producer under this section Part shall apply to every producer who has
materially participated in the making of a recommendation and received compensation as a result of the sales transaction, regardless of whether the producer has had any direct contact with the consumer, provided that product wholesaling or product support based on generic client information, or the provision of education or marketing material, does not constitute participating in the making of a recommendation.
Section 7. Insurance Producer Training
A. An insuranceA producer shall not solicit the sale of an annuity product unless the insurance producer has adequate knowledge of the product to recommend the annuity and the insurance producer is in compliance with the insurer’s standards for product training. An insuranceA producer may rely on insurer-provided product-specific training standards and materials to comply with this subsection.
B. (1) (a) An insurance A producer who engages in the sale of annuity products shall complete a one-
time four (4) credit training course approved by the department of insurance and provided by the department of insurance-approved education provider.
(b) Insurance pProducers who hold a life insurance line of authority on the effective date of this regulation and who desire to sell annuities shall complete the requirements of this subsection within six (6) months after the effective date of this regulation. Individuals who obtain a life insurance line of authority on or after the effective date of this regulation may not engage in the sale of annuities until the annuity training course required under this subsection has been completed.
(2) The minimum length of the training required under this subsection shall be sufficient to qualify for
at least four (4) CE credits, but may be longer.
(3) The training required under this subsection shall include information on the following topics:
(a) The types of annuities and various classifications of annuities; (b) Identification of the parties to an annuity;
(c) How product specific annuity contract features affect consumers; (d) The application of income taxation of qualified and non-qualified annuities;
(e) The primary uses of annuities; and (f) Appropriate standard of conduct, sales practices, replacement and disclosure requirements.
(4) Providers of courses intended to comply with this subsection shall cover all topics listed in the
prescribed outline and shall not present any marketing information or provide training on sales techniques or provide specific information about a particular insurer’s products. Additional topics may be offered in conjunction with and in addition to the required outline.
(5) A provider of an annuity training course intended to comply with this subsection shall register as a
CE provider in this State and comply with the rules and guidelines applicable to insurance producer continuing education courses as set forth in [insert reference to State law or regulations governing producer continuing education course approval].
(6) Annuity training courses may be conducted and completed by classroom or self-study methods in
accordance with [insert reference to State law or regulations governing producer continuing education course approval].
(7) Providers of annuity training shall comply with the reporting requirements and shall issue
certificates of completion in accordance with [insert reference to State law or regulations governing to producer continuing education course approval].
(8) The satisfaction of the training requirements of another State that are substantially similar to the
provisions of this subsection shall be deemed to satisfy the training requirements of this subsection in this State.
(9) The satisfaction of the components of the training requirements of any course or courses with
components substantially similar to the provisions of this subsection shall be deemed to satisfy the training requirements of this subsection in this state.
(9)(10) An insurer shall verify that an insurancea producer has completed the annuity training course
required under this subsection before allowing the producer to sell an annuity product for that insurer. An insurer may satisfy its responsibility under this subsection by obtaining certificates of completion of the training course or obtaining reports provided by commissioner-sponsored database systems or vendors or from a reasonably reliable commercial database vendor that has a reporting arrangement with approved insurance education providers.
Section 8. Compliance Mitigation; Penalties
A. An insurer is responsible for compliance with this regulation. If a violation occurs, either because of the
action or inaction of the insurer or its insurance producer, the commissioner may order: (1) An insurer to take reasonably appropriate corrective action for any consumer harmed by a failure to
comply with this regulation by the insurer’sinsurer, an entity contracted to perform the insurer’s supervisory duties or by its insurance producer’s, violation of this regulationthe producer;
(2) A general agency, independent agency or the insurance producer to take reasonably appropriate
corrective action for any consumer harmed by the insurance producer’s violation of this regulation; and
B. Any applicable penalty under [insert statutory citation] for a violation of this regulation may be reduced or
eliminated [, according to a schedule adopted by the commissioner,] if corrective action for the consumer was taken promptly after a violation was discovered or the violation was not part of a pattern or practice.
Drafting Note: Subsection B above is intended to be consistent with the commissioner’s discretionary authority to determine the appropriate penalty for a violation of this regulation. The language of subsection B is not intended to require that a commissioner impose a penalty on an insurer for a single violation of this regulation if the commissioner has determined that such a penalty is not appropriate. Drafting Note: A State that has authority to adopt a schedule of penalties may wish to include the words in brackets. In that case, “shall” should be substituted for “may” in the same sentence. States should consider inserting a reference to the NAIC Unfair Trade Practices Act or the State’s statute that authorizes the commissioner to impose penalties and fines. Section 9. [Optional] Recordkeeping
A. Insurers, general agents, independent agencies and insurance producers shall maintain or be able to make available to the commissioner records of the information collected from the consumer, disclosures made to the consumer and other information used in making the recommendations that were the basis for insurance transactions for [insert number] years after the insurance transaction is completed by the insurer. An insurer is permitted, but shall not be required, to maintain documentation on behalf of an insurancea producer.
Drafting Note: States should review their current record retention laws and specify a time period that is consistent with those laws. For some States this time period may be five (5) years.
B. Records required to be maintained by this regulation may be maintained in paper, photographic, micro-
process, magnetic, mechanical or electronic media or by any process that accurately reproduces the actual document.
Drafting Note: This section may be unnecessary in States that have a comprehensive recordkeeping law or regulation. Section 10. Effective Date The amendments to this regulation shall take effect [six (6)X] months after the date the regulation is adopted or on [insert date], whichever is later.
W:\Drafts\04-Model Laws, Regulations & Guidelines\# 275 - Suitability in Annuity Transactions Model Regulation\Model #275-2 Draft.docx
LIFE INSURANCE ILLUSTRATION ISSUES (A) WORKING GROUP November 9, 2018 / October 9, 2018 / September 24, 2018
Summary Report
The Life Insurance Illustration Issues (A) Working Group met via conference call Nov. 9, Oct. 9 and Sept. 24, 2018. During its meetings, the Working Group took the following action:
1. Continued making progress in the development of a one to two-page consumer-oriented policy overview document inorder to achieve its charge of improving the understandability of the life insurance policy summaries already required inSection 7B of the Life Insurance Illustrations Model Regulation (#582) and Section 5A(2) of the Life Insurance DisclosureModel Regulation (#580).
2. Discussed a proposal to simplify the revisions by revising Model #580 to include the requirement of a policy overviewdocument to accompany all life insurance policies along with the Buyer’s Guide.
3. Exposed Oct. 9 draft revisions to Model #580 incorporating the simplified approach for a public comment period endingDec. 10.
Life Insurance Illustration Issues (A) Working Group Conference Call
November 9, 2018
The Life Insurance Illustration Issues (A) Working Group of the Life Insurance and Annuities (A) Committee met via conference call Nov. 9, 2018. The following Working Group members participated: Richard Wicka, Chair, and Barbara Belling (WI); Jodi Lerner and Perry Kupferman (CA); Jim Walker and Vicki Twogood (FL); Teresa Winer (GA); Mary Mealer (MO); Matthew Holman (NE); and Doug Danzeiser and Philip Reyna (TX). Also participating was: Denise Lamy (NH).
1. Discussed Chair’s Oct. 9 Draft of Model #580 Incorporating CEJ Proposal
Mr. Wicka said on the Working Group’s Oct. 9 conference call, the Working Group discussed a proposal forwarded by Birny Birnbaum (Center for Economic Justice—CEJ). Mr. Birnbaum suggested revising the Life Insurance Disclosure Model Regulation (#580) and not the Life Insurance Illustrations Model Regulation (#582) to accomplish the goal of developing a simplified policy overview document for consumers.
Mr. Wicka said he incorporated Mr. Birnbaum’s proposal into a chair draft of Model #580 dated Oct. 9 (Attachment ? -A) that was distributed to the Working Group and interested parties and was posted on the Working Group’s web page.
Mr. Wicka explained that, generally, the revisions require that a policy overview document accompany all life insurance policies, to be delivered at the same time as the buyer’s guide. The policy overview would no longer be a “cover page” to the policy summary in Model #580 or the narrative summary in Model #582. He said what was called the “policy summary” in Model #580 would be renamed the “premium benefit patterns summary.” No revisions would need to be made to Model #582. Because the policy overview is no longer a cover page to the policy and narrative summaries, the cross-references to those documents that were part of the policy overview in previous drafts were removed. Mr. Wicka said he also moved some substantive provisions out of the “Definitions” section.
Mr. Birnbaum said he submitted written comments with some detailed language suggestions but, overall, he approves of the approach and appreciates Mr. Wicka considering his proposal.
Michael Lovendusky (American Council of Life Insurers—ACLI) said the ACLI does not want to discourage continued discussion, but noted that some of its members are still trying to understand the new approach and its implications. He said they appreciate not having additional requirements in Model #582, but are still concerned about the new obligations imposed by the revisions to Model #580 and just what is intended by the new policy overview and “premium benefit patterns summary.”
Mr. Wicka reiterated that the policy overview is the new requirement the Working Group has been working on over the past year and the “policy benefit patterns summary” is the existing “policy summary” renamed.
Mr. Lovendusky said the life insurance industry has changed over the past few years, with companies trying to remain competitive by creating more dynamic services and opportunities for consumers. He expressed concern that these summaries are going to be quickly outdated.
The Working Group agreed to expose the Oct. 9 draft of Model #580 for a public comment period ending Dec. 10.
Having no further business, the Life Insurance Illustration Issues (A) Working Group adjourned.
Life Insurance Illustration Issues (A) Working Group Conference Call October 9, 2018
The Life Insurance Illustration Issues (A) Working Group of the Life Insurance and Annuities (A) Committee met via conference call Oct. 9, 2018. The following Working Group members participated: Richard Wicka, Chair, and Jennifer Stegall and Barbara Belling (WI); Jodi Lerner (CA); Chris Struk (FL); Teresa Winer (GA); Mike Yanacheak (IA); Mary Mealer (MO); Matthew Holman (NE); Jana Jarrett (OH); and Doug Danzeiser (TX). Also participating were: Denise Lamy (NH); David Bolton and Glenda Villamar (OR); Sarah Neil (RI); Travis Jordan (SD); and David Hippen (WA).
1. Discussed Comments on July 25 Draft Revisions to Model #582
Mr. Wicka reminded the Working Group that comments were requested by Aug. 31 on the July 25 draft revisions to the Life Insurance Disclosure Model Regulation (#580) and the Life Insurance Illustrations Model Regulation (#582). The Working Group continued reviewing comments on Model #582.
a. Living Benefit Options
Mr. Wicka said the American Council of Life Insurers (ACLI) suggested that the requirement “living benefit options” should be “living benefit option(s)” because there may be only one, or no options available. The Working Group agreed to make this change.
b. Accumulation of Cash Value
Mr. Wicka said the ACLI comment letter suggested clarifying that the “accumulation of cash value” is a “yes or no” question. Mr. Wicka said the American Academy of Actuaries (Academy) comment letter questioned whether the accumulated values being requested are guaranteed or nonguaranteed or both. Mr. Wicka said he intended this to be a “yes or no” question, which takes care of the Academy’s concern about which values are being shown. Mr. Struk agreed that this should be a “yes or no” question. Birny Birnbaum (Center for Economic Justice—CEJ) agreed that this is a “yes or no” question, but it should include a reference to where more detailed information can be found in the illustration.
c. Guaranteed Interest Rates
The Working Group discussed the “guaranteed interest rate” requirement. The ACLI comment letter said there may be policies with a combination of fixed and indexed account options and recommended showing guaranteed interest rates for fixed or indexed accounts that have been illustrated.
Ms. Lerner said consumers should be able to see guaranteed interest rates, but expressed concern that consumers could easily become overwhelmed with too many interest rates listed. Mr. Birnbaum said the policy overview is not an addendum to the illustration and suggested that consumers need to see guaranteed interest rates in order to comparison shop. He suggested that the guaranteed rate for a fixed account could be listed and, for indexed accounts, a separate sheet of guaranteed interest rates could be distributed if necessary.
Mr. Wicka asked whether the guaranteed interest rates for fixed accounts should be included and the indexed account information can be left to the illustration or policy summary for non-illustrated products. Mr. Birnbaum said universal life policies are marketed as investment or cash accumulation vehicles, and the ability to compare options for investments is critical to making a choice. He said a separate investment options page with guaranteed elements listed would be helpful to consumers. Mr. Wicka said he would draft revisions for the Working Group and interested parties to review.
d. Timing of Policy Overview Delivery
Mr. Wicka said he drafted the following provision for the Working Group’s consideration: “An insurer may provide a copy of the policy overview described in this section prior to providing the full narrative summary if this document is also provided when the full illustration is delivered.” He said he drafted this provision to allow the policy overview to be delivered as a stand-
Attachment Life Insurance and Annuities (A) Committee
alone document. Mr. Birnbaum agreed that the policy overview should be a stand-alone document in order to facilitate comparison shopping.
e. Effective Date
Emily Micale (ACLI) said the ACLI comments suggested including a drafting note allowing for a delayed effective date for compliance with the policy overview requirement. Mr. Wicka said he would draft a placeholder for an effective date.
f. Policy Overview for Basic Illustrations Only
Donna Megregian (Academy) said the Academy’s comment letter requested clarification regarding whether a policy overview would be required only for basic illustrations, not supplemental illustrations. Mr. Wicka said supplemental illustrations are addressed in a separate section of the model and would not be impacted by the additional requirements being added to the section on basic illustrations.
2. Discussed CEJ Proposal to Revise Model #580 and Not Model #582
The Working Group discussed the proposal forwarded by Mr. Birnbaum on Sept. 23, 2018, and posted to the Working Group’s web page. Mr. Birnbaum said his proposal aligns the concept of a “policy overview” with the different purposes of Model #580 and Model #582, while in keeping with the charge to “explore how the narrative summary required by Section 7B of Model #582 and the policy summary required by Section 5A(2) of Model #580 can be enhanced to promote consumer readability and understandability of these life insurance policy summaries, including how they are designed, formatted and accessed by consumers.”
Mr. Birnbaum said the purpose of Model #582 is to make sure illustrations do not mislead people, while the purpose of Model #580 is to require insurers to deliver information to improve buyers’ and potential buyers’ ability to select the most appropriate plan of life insurance and improve understanding of the basic features the life insurance policy they are buying or considering. He said, given these different purposes, the policy summary should be revised along the lines of what the Working Group has been drafting and added to Model #580 only, for delivery to consumers at the same time as the buyer’s guide. He said this policy overview document would accompany all life insurance policies, regardless of whether they are illustrated. Then, for policies that are not illustrated, a separate statement of policy benefits and payments (i.e., a sort of “mini-illustration”) would be created and included with the policy summary document.
Ms. Micale said the ACLI plans to review the CEJ’s proposal more carefully, but the initial reaction to the proposal is favorable. Mr. Wicka said he would make revisions to Model #582 based on the Working Group’s discussion during this conference call, as well as incorporate the CEJ proposal into Model #580 for review and discussion on the Working Group’s next call.
Mr. Wicka said if the Working Group decides to go with the approach in the CEJ proposal, the change will have to be approved by the Life Insurance and Annuities (A) Committee and the Request for NAIC Model Law Development would have to be revised.
Having no further business, the Life Insurance Illustration Issues (A) Working Group adjourned.
Life Insurance Illustration Issues (A) Working Group Conference Call
September 24, 2018
The Life Insurance Illustration Issues (A) Working Group of the Life Insurance and Annuities (A) Committee met via conference call Sept. 24, 2018. The following Working Group members participated: Richard Wicka, Chair, and Jennifer Stegall (WI); Jodi Lerner and Perry Kupferman (CA); Chris Struk (FL); Teresa Winer (GA); Mike Yanacheak (IA); Robert Harkins (NE); Tynesia Dorsey (OH); and Philip Reyna and John Carter (TX). Also participating were: Denise Lamy (NH); and David Hippen (WA).
1. Discussed Comments on July 25 Draft Revisions to Model #582
Mr. Wicka said comments were requested by Aug. 31 on the July 25 draft revisions to the Life Insurance Disclosure Model Regulation (#580) and the Life Insurance Illustrations Model Regulation (#582). The Working Group discussed comments on Model #582.
a. Policy Overview
Mr. Wicka said a comment from Ms. Lerner suggested calling the “cover document” a “policy overview,” and the Working Group agreed to the change. Ms. Lerner suggested that a font size requirement might be necessary because the policy overview encourages insurers to keep to a two-page limit. Ms. Lerner was concerned that the readability of the policy overview might be sacrificed by insurers using a small font size to meet the two-page limit.
Emily Micale (American Council of Life Insurers—ACLI) said the ACLI has a similar concern with the page limit and suggested that two pages is not reasonable given the amount of information requested and the complexity of many policies. Ms. Micale said it is important to ACLI members that there be flexibility in the number of pages to account for the breadth of information included and the ability to customize the overview to reflect the complexities of the different types of policies.
Mr. Wicka said the language in the revisions that “insurers should endeavor to limit the overview to no more than 2 pages” is a proposed as a goal rather than a requirement. Mr. Struk said he would prefer not to set a font size if the page limit is optional. Ms. Lerner suggested setting different page limits for different types of policies; e.g., term policies could be two pages and allow for more pages for universal life policies.
Mr. Wicka suggested a compromise might be including language stating the goal of the policy overview is to provide information in as few pages as possible in a readable format, but that the Working Group might have a better idea of page length after the sample policy overview is completed.
Birny Birnbaum (Center for Economic Justice—CEJ) agreed that the page limit decision should be made after the sample is completed. Mr. Birnbaum also expressed concern with Ms. Micale’s comment about customization, noting that he would like the Working Group to keep in mind the goal of providing consumers with a document that can be used to compare policies.
b. Information About the Insured
The Working Group discussed the data elements included in the “information about the insured” that is required in the policy overview, if applicable. The ACLI comment letter suggested that the policy overview document include the “sex of the insured or insureds” rather than the “gender of the insured or insureds,” as “sex” refers to biological characteristics rather than social norms or attributes, which is consistent with language used elsewhere in the model. The Working Group agreed to this change.
The ACLI comment letter suggested deleting the “date of birth of the insured or insureds” because it may raise privacy concerns, noting that the information is not necessary given that “issue age of the insured or insureds” is also included. The Working Group agreed to delete the requirement.
Attachment Life Insurance and Annuities (A) Committee
The ACLI comment letter also suggested changing the requirement “a narrative description of any health factors that are used in underwriting and, if the narrative summary is provided prior to underwriting, whether a physical examination will be required” with “in the course of considering an insured’s application, an insurer may request or collect health information about the insured in a variety of ways, including, but not limited to by a physical examination.” Mr. Wicka suggested including more general language in addition to a “yes or no” question regarding whether a physical exam is required. Ms. Micale said she would confirm whether that compromise language would be acceptable to the ACLI.
c. Cost Information The ACLI comment letter suggested cross-referencing the illustration or policy rather than including “a short statement describing if the premium and other costs vary after the first year, and, if so, how premium and other costs will be determined after the first year.” Ms. Micale explained that the phrasing of the disclosure does not working for products with a flexible premium option. She also said that costs and premiums are different factors. Mr. Wicka agreed that costs are addressed elsewhere and should be deleted from this requirement. He suggested including a “yes or no” question asking whether premiums can vary after the first year. And if the answer is “yes,” include instructions about where to find additional information. Ms. Lerner suggested including an additional statement that premiums may increase. Donna Megregian (American Academy of Actuaries—Academy) cautioned against trying to include too much information in the overview itself, such as how a company manages non-guaranteed elements. She suggested informing the consumer of whether there is a fixed premium and, if not, include a cross-reference to the illustration where funding is described. Ms. Megregian cautioned against simply stating premiums may increase because the amount required to keep a policy in force may increase, but it also may decrease. Mr. Birnbaum said that as long as the basics are included—i.e., whether it is fixed, variable or flexible premium—a reference to other documents where premium is discussed could be included. Mr. Wicka agreed to include this approach in the next draft.
d. Options for Premium Funding The Working Group discussed the ACLI suggestion to change the language “available options for premium funding, including policy payment periods, application of dividends toward premium, and lump sum payment options” to account for policies that do not have dividends or other options listed. Mr. Wicka agreed that this could be rewritten to allow for customization to the product being described.
e. Waiver of Premium and Any Available Riders The Working Group discussed the ACLI suggestion to move “waiver of premium options” to the list of “any available optional riders.” Mr. Birnbaum said this should stay under “cost information,” rather than move to the “riders” section. Ms. Lerner agreed that a waiver of premium implies a cost and asked if “waiver of deductions” should be included here, as well. Mr. Wicka suggested keeping “waiver of premium or deductions” in the “cost information” section as a “yes or no” question, with a reference to the section where additional benefits and riders are listed.
f. Initial Death Benefit and Short Description of Changes That May Occur The Working Group discussed the ACLI suggestion to delete this section because the death benefit is already described in the illustration and it is duplicative to describe it again in the policy overview. Mr. Birnbaum disagreed because it is not already in Model #580, and even with Model #582, it is not part of the policy overview and is information that should be included so consumers can easily compare one policy to another by comparing the policy overviews. Ms. Megregian said Mr. Birnbaum’s comment raises the issue the Academy expressed in its letter; i.e., that this policy overview will somehow replace the illustration rather than be a resource or guide to the longer descriptions. Mr. Wicka agreed that the short description may not need to be included and suggested including whether there is an initial death benefit, and can it change “yes or no”
Attachment Life Insurance and Annuities (A) Committee
The ACLI comment letter suggested that “death benefit options” should really be “death benefit option” because it refers to the death benefit option that has been chosen. Mr. Wicka agreed.
h. Policy Loan Option and Applicable Charges
The ACLI comment letter suggested that the reference to policy loan “options” should really refer to a single “option.” Mr. Wicka agreed.
i. Additional Policy Benefits
The Working Group discussed the information under the section titled, “additional policy benefits.” The ACLI suggested that the information about “any available optional riders [as requested by the insured] and their cost” should refer to “any available optional riders as requested by the insured” and include a cross-reference to where cost information can be found, because costs for certain riders can be complicated.
Mr. Birnbaum said all available options may create cost issues, but if a consumer has requested it, costs should be included so the consumer can compare. Ms. Megregian cautioned that the costs may be based on net amounts of risk and may change over time. She suggested that the information could get quite voluminous for an overview document and would be better answered in a specific illustration. Mr. Birnbaum said consumers should be able to get some level of information about costs. Ms. Micale offered that some riders are free. Mr. Wicka suggested “any available optional riders as requested by the insured, and if there is an additional cost.”
Mr. Wicka said the Working Group would meet via conference call within the next few weeks to discuss the remaining comments, including Mr. Birnbaum’s comments on the structure, timing and delivery of the policy overviews under Model #580 and Model #582.
Having no further business, the Life Insurance Illustration Issues (A) Working Group adjourned.
LIFE INSURANCE ONLINE GUIDE (A) WORKING GROUP October 10, 2018
Summary Report
The Life Insurance Online Guide (A) Working Group met via conference call on Oct. 10, 2018. During this meeting, the Working Group took the following action:
1. Discussed an outline “decision tree” format for an online guide and agreed to explore an alternate “table” format todetermine which the Working Group preferred.
2. Planned to continue discussions via conference call following the Fall National Meeting.
Life Insurance Online Guide (A) Working Group Conference Call October 10, 2018
The Life Insurance Online Guide (A) Working Group of the Life Insurance and Annuities (A) Committee met via conference call Oct. 10, 2018. The following Working Group members participated: Mary Mealer, Chair (MO); Robert E. Harkins (NE); and Matthew Gendron and Sarah Neil (RI). Also participating were: Perry Kupferman (CA); Michael Chrysler (IL); Tate Flott (KS); Jeremy Gladstone (NV); Cuc Nguyen (OK); and Philip Reyna (TX).
1. Reviewed CEJ Outline
Ms. Mealer explained that this Working Group is the continuation of the Life Insurance Buyer’s Guide (A) Working Group. It has the same membership; it has just been renamed to reflect the revised charge given to the Working Group by the Life Insurance and Annuities (A) Committee at the Summer National Meeting.
The Life Insurance Online Guide (A) Working Group has a charge to “develop an online resource on life insurance, including the evaluation of existing content on the NAIC website, to be published digitally for the benefit of the public.” Ms. Mealer said the Life Insurance Buyer’s Guide (A) Working Group had recommended this new charge based on discussions it had while drafting the Life Insurance Buyer’s Guide (Buyer’s Guide).
Ms. Mealer explained that during the work on the Buyer’s Guide, Birny Birnbaum (Center for Economic Justice—CEJ) had submitted a draft outline for an online tool (CEJ outline), which was posted on the Working Group’s web page as a starting point for this Working Group’s discussions. Ms. Mealer explained that she had filled in some of the substance in the outline, which was also posted, to illustrate to the Working Group how more information might be filled in. Ms. Mealer emphasized that all posted materials were intended to facilitate discussion and did not represent any final decisions.
Ms. Mealer said she would like for the Working Group to discuss the CEJ outline to determine whether additional topics are needed, or whether there are topics that should be eliminated. She said that once the outline is more set, she would like to ask for volunteers to help with drafting. Mr. Birnbaum explained that the CEJ outline represents a “decision tree” approach, guiding consumers to content based on what they want to see.
Ms. Mealer explained that the CEJ outline starts with two options: A) I’m interested in buying life insurance; or B) I have a life insurance policy and have questions. If the consumer clicks on option A, they have two more options 1) I’m interested in buying life insurance and want to learn more; or 2) I know what life insurance product I want and want to learn more about it. Depending on which question a consumer clicks on, they would be taken to another page with more information. For consumers who know which product they want, they could click on a product type and get a list of key features and cautions.
Ms. Winer cautioned against assuming that people know what kind of product they want to buy; even if they think they know, they often do not know what they do not know.
Donna Megregian (American Academy of Actuaries—Academy) cautioned against creating a tool that makes a recommendation and suggested that the outline separate out the question “How much life insurance do I need?” from the question “What kind of life insurance should I buy?”
Emily Micale (American Council of Life Insurers—ACLI) also cautioned against a creating a tool that makes a recommendation. Ms. Micale said the online tool should focus on education and suggested creating an online tool that builds upon the Buyer’s Guide.
Mr. Birnbaum agreed that the online tool should not provide advice, but should guide consumers to information they want and need through a decision tree-type process.
Mr. Chrysler said he prefers websites that present information in a table format. He said he envisions a table of the different life insurance products, with key features, such as whether there is cash value or fixed premium, with the ability to click for additional information.
Attachment Four Life Insurance and Annuities (A) Committee
Ms. Mealer said she would work with Mr. Chrysler to create a draft table for the Working Group to review as an alternative way of presenting information.
Having no further business, the Life Insurance Online Guide (A) Working Group adjourned.
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2018 Fall National Meeting San Francisco, California
LIFE ACTUARIAL (A) TASK FORCE Tuesday, November 13, 2018, 8:00 a.m. – 4:30 p.m. Wednesday, November 14, 2018, 8:00 – 11:00 a.m.
Meeting Summary Report
The Life Actuarial (A) Task Force met Nov. 13-14, 2018. During these meetings, the Task Force:
1. Adopted its Oct. 18, Oct. 11, Oct. 4, Sept. 27 and Sept. 13 minutes, which included the following action:a. Adopted its Summer National Meeting minutes.b. Adopted the 2019 Generally Recognized Expense Tables (GRET).c. Adopted its 2019 proposed charges.d. Adopted an amendment to remove the 450% risk-based capital (RBC) requirement from the Life principle-based
reserving (PBR) Exemption.e. Exposed proposed amendments to the 2019 edition of the Valuation Manual for 2020 implementation, including
amendments to:1. Define the terms “product group” and “term life insurance policy.”2. Adjust company experience mortality rates when company experience is higher than the industry table used for
grading.3. Address the low returns experienced by indexed universal life (IUL) policies.4. Address the use of the top-down and bottom-up approaches for aggregating mortality segments when
determining credibility.5. Clarify the application of net premium reserve (NPR) shock lapses for reinsurance assumed on a yearly
renewable term (YRT) basis, term riders and paid-up riders.6. Prohibit the capping of insurance amounts when determining credibility.
2. Exposed amendment proposal 2018-57, which allows adjustments to the Commissioners Standard Ordinary (CSO) tableused to calculate the NPR when anticipated mortality experience materially exceeds the prescribed CSO table.
3. Discussed the public 2017 Principle-Based Reserves (PBR) Review Report based on the Valuation Analysis (E)Working Group review of the 2017 VM-20 Reserves Supplement and PBR Actuarial Reports. The Working Groupprovided recommendations and referrals for Valuation Manual amendments to improve company reporting of PBRreserves and supporting information to the Task Force.
4. Adopted the report of the Experience Reporting (A) Subgroup. Exposed a Subgroup proposal for revisions to VM-51,Experience Reporting Formats, to add plan type sub-categories, which will enable the capture of more information andwill support better analysis.
5. Adopted the report of the C-3 Phase II/AG 43 (E/A) Subgroup, which included an update on efforts to implement theVariable Annuity (VA) Framework.
6. Adopted the report of the Longevity Risk (A/E) Subgroup.
7. Received an update on the work of the Model #805 Drafting Group. The Drafting Group will no longer continue effortsto develop an Actuarial Guideline for guidance for Section 6 of the Standard Nonforfeiture Law for Individual DeferredAnnuities (#805). The Drafting Group also discussed downgrading the Annuity Nonforfeiture Model Regulation (#806) tomodel guidance due to its limited adoption by states.
8. Heard an update on the Society of Actuaries’ (SOA) research and education.
9. Heard an update from the SOA on life mortality improvement factors.
10. Heard an update from the Reinsurance Work Group of the American Academy of Actuaries (Academy) on the allocationof reinsurance reserve credits to the modeled reserve. Exposed amendment proposal 2018-56, which proposes to allow
for a negative reserve credit. The Work Group also presented a method for allocating the reinsurance credit. The Task Force agreed to have the NAIC VM Review Group review the method.
11. Adopted amendment proposal 2018-49, which updates the wording of VM-20, Requirements for Principle-Based
Reserves for Life Products, Section 3.B.6.d.iii to be consistent with previously adopted amendment proposal 2017-88. 12. Adopted amendment proposal 2018-50, which requires the disclosure of identifying information for the company’s
modeling system.
13. Adopted amendment proposal 2018-51, which requires submission of the PBR Actuarial Report as a searchable PDF and provides other guidance.
14. Adopted amendment proposal 2018-54, which requires a detailed breakdown of the universal life with secondary guarantees (ULSG) in the VM-31 PBR Report.
15. Adopted amendment proposal 2018-06, which reflects the Standard Nonforfeiture Law for Life Insurance (#808) in VM-02, Minimum Nonforfeiture Mortality and Interest, Section 5.2.a.
16. Exposed amendment proposal 2018-41, which moves definitions for “industrial life,” “preneed” and “ordinary life insurance” from VM-02 to VM-01, Definitions for Terms in Requirements, for a public comment period ending Jan. 3.
17. Adopted amendment proposal 2018-52, which recognizes substandard extra mortality in the NPR calculation.
18. Adopted amendment proposal 2018-17, which provide requirements for the aggregation of mortality segments.
19. Exposed amendment proposal 2018-44, which revises the determination of return on assets used in the hedging of credited amounts for indexed accounts in the calculation of the deterministic reserve, for a public comment period ending Jan. 3.
20. Exposed amendment proposal 2018-58, which provides for the treatment of non-guaranteed YRT reinsurance premiums, for a public comment period ending Jan. 31.
21. Re-exposed amendment proposal 2018-53, which clarifies that the weighted average lifetime of assets in the alternative investment strategy should be comparable to those in the company’s real investment strategy, for a public comment period ending Jan. 3.
22. Heard an update from the Interstate Insurance Product Regulation Commission (IIPRC).
23. Heard an update from Josh Windsor (NAIC) on international developments.
24. Adopted the report of the VM-22 (A) Subgroup which included a request to the Task Force to allow the Subgroup to consider revisions to VM-22, Statutory Maximum Valuation Interest Rates for Income Annuities, to add assumptions and methodology. It was determined that the request is within the scope of the Task Force charges and will be considered.
25. Heard an update from the Academy Annuity Reserves Work Group on the proposed timeline and approach for
development of a modeled reserve and an exclusion test for non-variable annuities. 26. Heard an update from the Academy SVL Interest Rate Modernization Work Group on the development of valuation
interest rates for non-variable annuities, other than single premium immediate annuities (SPIAs). 27. Heard an update from the SOA on the Group Life Waiver of Premium Study results. 28. Heard an update from the Academy PBR Governance Work Group. 29. Heard an update from the Academy Council on Professionalism. W:\National Meetings\2018\Fall\TF\LA\National Meeting\LATF Summary Fall 2018.doc
Influences of Generation on Retirement Readiness
Detailed Findings
135
Baby Boomers, Generation X, and Millennials face unique circumstances as well as common challenges in
achieving long-term financial security. Baby Boomers (born 1946 to 1964) have re-written societal rules at
every stage of their life – and are now trailblazing a new brand of retirement. Generation X (born 1965 and
1978) entered the workforce in the late 1980s and were making their first appearance and defined benefit
plans were beginning to disappear. Millennials (born 1979 to 2000) are a digital do-it-yourself generation of
retirement savers that will be self-funding a greater portion of their future retirement income compared to older
generations. All three generations face risks and opportunities for improving their long-term retirement outlook.
Forty Indicators of Retirement Readiness
• Confidence in Retiring Comfortably. More than half of workers are “somewhat” or “very” confident that they
will be able to retire comfortably; confidence is highest among Millennials (67 percent) and Baby Boomers
(62 percent) and notably lower among Generation X (55 percent). Relatively few workers of all three
generations are “very” confident, including 22 percent of Millennials, 14 percent of Generation X, and 16
percent of Baby Boomers.
• Recovery From the Great Recession. Many workers across generations have not yet fully recovered from
the Great Recession. Financial recovery varies across generations. Millennial workers (27 percent) are
most likely to say they were “not impacted,” followed by Generation X (16 percent) and Baby Boomers (14
percent). Generation X (23 percent) are more likely than Baby Boomers (18 percent) and Millennials (17
percent) to say they have “not yet begun to recover” or “may never recover.”
• Building a Large Enough Nest Egg? At least half of Generation X (50 percent) and Baby Boomers (53
percent) either “somewhat” or “strongly” agree that they are building a large enough retirement nest egg,
and slightly more Millennials (56 percent) agree. Among all three generations, fewer than one in four
“strongly” agree.
Influences of Generation on Retirement Readiness
136
• Retirement Dreams Include Leisure and Work. Workers across generations share the same top three
retirement dreams: traveling, spending more time with family and friends, and pursuing hobbies. Workers
of all generations most frequently cite traveling as a retirement dream, including Millennials (73 percent),
Generation X (69 percent), and Baby Boomers (65 percent). The second most frequently cited retirement
dream is spending more time with family and friends (59 percent Millennials, 55 percent Generation X, 55
percent Baby Boomers). Interestingly, 36 percent of Millennials, 27 percent of Generation X, and 25
percent of Baby Boomer workers dream of doing some sort of work in retirement.
• Retirement Beliefs, Preparations, and Involvement. Across generations, at least three out of four workers
agree that their generation will have a much harder time achieving financial security compared to their
parent’s generation. Generation X (83 percent) and Millennials (80 percent) are more likely than Baby
Boomers (65 percent) to be concerned that Social Security will not be there for them when they are ready
to retire.
• Expected Retirement Age. Sixty-six percent of Baby Boomers expect to either work past age 65 (53
percent) or do not plan to retire (13 percent). Fifty-six percent of Generation X share these expectations
including 43 percent who plan to work past age 65 and 13 percent who do not plan to retire. In contrast,
the majority of Millennials (58 percent) expect to either retire at age 65 (25 percent) or sooner (33
percent).
• Planning to Work in Retirement. More than half of workers across generations plan to continue working
after they retire, including 54 percent of Baby Boomers, 54 percent of Generation X, and 58 percent of
Millennials. Among those planning to work, most plan to do so on a part-time basis.
• Reasons for Working in Retirement. Many workers across the generations who expect to retire after age 65
or work after retirement cite financial reasons (Millennial, 81 percent; Generation X, 85 percent; Baby
Boomer, 84 percent) and a smaller majority cite healthy-aging reasons (Millennial, 78 percent; Generation
X, 69 percent; Baby Boomer, 74 percent).
Influences of Generation on Retirement Readiness
137
• Retirement Transitions: Phased Versus Immediate. Many workers across the three generations plan to
either transition into retirement by changing work patterns (e.g., shifting from full-time to part-time or
working in a different capacity) or plan to continue working until they cannot work any longer. Baby
Boomers (26 percent) are more likely to plan to immediately stop working when they reach a certain age or
savings goal compared to Generation X and Millennials (both 22 percent).
• Phased Retirement and Compensation-Related Expectations. Among workers who envision a phased
transition into retirement, most have realistic expectations regarding how changes in their work
arrangements may affect their job title, compensation, and benefits. The majority of workers across
generations who envision a phased transition into retirement expect to receive the same benefits they
have now if they were to shift from full-time to part-time work at their current employer. Baby Boomer (83
percent) workers are more likely to believe that if they reduce their work hours at their current employer,
they would expect to be paid the same hourly rate that they earn now, followed by slightly fewer Millennial
(78 percent) and Generation X workers (76 percent).
• Perceptions of Older Workers. Ageism is a common concern in today’s society, especially with so many
workers planning to extend their working lives beyond age 65. More Baby Boomer and Generation X than
Millennial workers have positive perceptions of workers age 50 and older compared to younger workers in
today’s workforce. Baby Boomer (80 percent) and Generation X (65 percent) believe workers age 50 and
older bring more knowledge, wisdom, and life experience, compared to 47 percent of Millennial workers
who think this.
Influences of Generation on Retirement Readiness
138
• Age That Workers Consider a Person to Be “Old.” The median age a worker considers a person to be “old”
rises with each generation from younger to older (Millennials, 65 years old; Generation X, 70 years old;
Baby Boomer, 75 years old). Slightly more than half of Baby Boomers (52 percent) think “it depends on
the person,” significantly more than Millennial (33 percent) or Baby Boomer (37 percent) workers.
• Age That Workers Consider a Person to Be “Too Old” to Work. Workers across generations have a smaller
range of the age they consider to be “too old” to work. Millennial workers believe that the age of 70
(median) is “too old” for a person to work, while Generation X and Baby Boomer workers believe that 75
(median) is “too old” to work. More than half of Baby Boomers (69 percent) and Generation X (54 percent)
think “it depends on the person” compared to fewer Millennials (44 percent).
• Level of Concern About Health in Older Age. Many workers, regardless of generation, are “very” or
“somewhat concerned” about their health in older age, including 75 percent of Generation X, 73 percent of
Millennial, and 71 percent of Baby Boomer workers. Interestingly Millennial workers are most likely to be
“very concerned” about their health (27 percent), compared to Generation X (24 percent) and Baby
Boomers (17 percent).
• Engagement in Health-Related Activities on a Consistent Basis. Workers across generations are engaging
in health-related activities on a consistent basis. In general, higher proportions of Baby Boomers are doing
these activities compared to both Generation X and Millennial workers.
• Planning to Live to Age ... Workers across generations share similar expectations regarding the age they
are planning to live to with each generation planning to live to the age of 90 (median among those who
gave an estimate). Nearly one in five Millennials (18 percent) expect to live to 100+ compared to 13
percent in Generation X and 10 percent in Baby Boomers.
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• Current Financial Priorities. Financial priorities change by life stage although some are common to all
“paying off debt” (NET) is the most frequently cited current financial priority across generations, including
Baby Boomers workers (59 percent), Generation X (72 percent), and Millennials (67 percent). Baby
Boomer workers (72 percent) are more likely to cite saving for retirement as a financial priority compared
to Generation X (61 percent) and Millennials (45 percent).
• Greatest Financial Priority Right Now. Baby Boomers are most likely to cite “saving for retirement” as their
greatest financial priority right now (39 percent), compared to Generation X (21 percent) and Millennials (9
percent).
• Types of Household Debt. Debt poses a significant financial risk to workers across generations. Credit card
debt is the most common household debt among Millennial (59 percent), Generation X (66 percent), and
Baby Boomer (55 percent) workers. Millennial workers are more likely to have student loans, personal
loans, or payday loans compared to older workers.
• Estimated Emergency Savings. Many workers lack emergency savings that could help cover the cost of a
major financial setback (e.g., unemployment, medical bills, home repairs, auto repairs, other). Emergency
savings are low across the three generations, including Millennials at $2,000 (median), Generation X at
$4,000 (median), and Baby Boomers at $10,000 (median). Moreover, one in four Millennials (27 percent)
have saved less than $1,000. Baby Boomers (27 percent) are more likely to have saved more than
$25,000.
• Saving for Retirement / Age Started Saving. The majority of workers across all three generations are saving
for retirement through an employer-sponsored plan and/or outside of work. Baby Boomers (85 percent)
are most likely to be saving, followed by Generation X (80 percent) and Millennials (71 percent). In terms of
the median age that they started saving, Millennials started at a younger age (age 24) compared to
Generation X (age 30) and Baby Boomers (age 35).
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140
• Expected Sources of Retirement Income. Self-funded savings including retirement accounts (e.g., 401(k)s,
403(b)s, IRAs) and other savings and investments are the most frequently cited source of retirement
income expected by Millennials (84 percent) and Generation X (81 percent), while Baby Boomers are most
likely to expect income from Social Security (91 percent).
• Expected Primary Source of Income in Retirement. Millennial (41 percent) and Generation X (41 percent)
workers most frequently cite 401(k)s, 403(b)s, or IRAs to be their expected primary source of retirement
income, while Baby Boomers (37 percent) are more likely to expect to rely on Social Security during
retirement. Approximately one in seven Millennials (17 percent) and Generation X (15 percent) expect
“working” to be their primary source of retirement income.
• Importance of Retirement Benefits Compared to Other Benefits. The vast majority of workers — including
89 percent of Millennials, 91 percent of Generation X, and 85 percent of Baby Boomers — believe that a
401(k) or similar plan is a “somewhat” or “very” important employee benefit. This trend has remained
consistent over time.
• Retirement Benefits Currently Offered. Most workers are offered a 401(k) or similar plan by their
employers. Generation X (75 percent) are more likely to be offered such benefits compared to Millennials
(68 percent) and Baby Boomers (71 percent). Few workers are offered a company-funded defined benefit
plan.
• Retirement Plan Participation. Among workers who are offered a 401(k) or similar plan, Generation X and
Baby Boomers (both 85 percent) are more likely to participate in the plan compared to Millennial workers
(75 percent).
• Retirement Plan Contribution Rate. Among workers who participate in a 401(k) or similar plan, Millennials
contribute 10 percent (median) of their annual pay, up from 7 percent (median) last year. Baby boomer
workers also contribute 10 percent (median) while Generation X workers contribute 8 percent (median).
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141
• Appeal of Automatic Enrollment. Automatic enrollment is a retirement plan feature that eliminates the
decision-making and action steps normally required of employees to enroll and to start contributing to the
plan. It simply automatically enrolls employees into a plan and they only need to take action if they desire
to opt out and not contribute to the plan. The majorities of workers across generations find automatic
enrollment appealing, including Millennials (82 percent), Generation X (83 percent) and Baby Boomers (77
percent). Millennial workers suggest the highest median appropriate default contribution rate (10 percent)
compared to Generation X (6 percent) and Baby Boomers (6 percent).
• Likelihood of Using Automatic Escalation. Likelihood to use a feature that automatically increases their
contribution by 1% each year is high across the generations. However, more Millennials (78 percent) and
Generation X (75 percent) workers indicate they are likely to use the feature than Baby Boomers (71
percent).
• Use of Professionally Managed Offerings. “Professionally managed” accounts refers to a managed account
service, strategic allocation funds, and/or target date funds. The majority of plan participants across
generations use some form of professionally managed offering in their 401(k) or similar plans: 63 percent
of Millennials, 60 percent of Generation X, and 53 percent of Baby Boomers.
• Asset Allocation of Retirement Investments. Workers across generations most frequently cite that their
retirement savings are invested in a relatively equal mix of stocks and investments such as bonds, money
market funds and cash; however, more Baby Boomers (47 percent) invest this way compared to
Generation X (39 percent) and Millennials (35 percent). A concerning 26 percent of Millennials are “not
sure” how their savings are invested.
• Retirement Plan Leakage: Loans and Withdrawals. A concerning percentage of workers are dipping into
their retirement savings before they retire. “Leakage” from retirement plans in the form of loans and
withdrawals can severely inhibit the growth of participants’ long-term retirement savings. Generation X (30
percent) and Baby Boomers (28 percent) workers are more likely to have taken some form of loan, early
withdrawal, and/or hardship withdrawal from a 401(k), compared to Millennials (22 percent).
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142
• Total Household Retirement Savings. Baby Boomer workers have the highest reported total household
retirement savings at $164,000 (estimated median) compared to Generation X ($72,000) and Millennials
($37,000). Baby Boomer workers (42 percent) are most likely to have saved $250,000 or more compared
to Generation X (30 percent) and Millennials (21 percent). A worrying 14 percent of Millennials have less
than $5,000 in retirement savings.
• Estimated Retirement Savings Needs. Millennial workers believe that they will need to have saved
$400,000 (median) in order to feel financially secure when they retire while Generation X and Baby
Boomers feel they will need to have $500,000 (median).
• Basis for Estimating Retirement Savings Needs. Many workers are “guessing” their retirement savings
needs, including 48 percent of Millennials, 48 percent of Generation X, and 45 percent of Baby Boomers.
Fewer than one in 10 say they have used a retirement calculator to estimate their needs.
• Retirement Strategy: Written, Unwritten, or None. Achieving retirement readiness is more than just saving
enough; it involves planning for both the expected and, moreover, the unexpected. One of the most
important secrets to attaining retirement readiness is having a well-defined written strategy about
retirement income needs, costs and expenses, and risk factors. The majority of workers across all
generations has a retirement strategy including 66 percent of Baby Boomers, 62 percent of Generation X
and 63 percent of Millennials. However, across generations, workers’ retirement strategies are seldom
written.
• Confidence that Financial Strategy Will Enable Travel Goals. Among workers who dream of traveling in
retirement, most are confident their current financial strategy will allow them to meet their travel goals,
including 60 percent of Millennials, 54 percent of Generation X, and 62 percent of Baby Boomer workers.
However, relatively few across generations are “very” confident (24 percent Millennials, 16 percent
Generation X, 20 percent Baby Boomers). Interestingly, some workers say that they haven’t given it much
