Contingent deferred annuities need more state-level regulation

The General Accounting Office was asked to explore the risks involved with two types of annuities that offer guaranteed lifetime withdrawals. It found that one of the products it investigated was not regulated well at the state level and could pose a risk to consumers.

Variable annuities with guaranteed lifetime withdrawal benefits (VA/GLWB ) and contingent deferred annuities (CDA) both provide consumers with access to investment assets and the guarantee of lifetime income, but while VA/GLWB assets are held in a separate account of the insurer for the benefit of the annuity purchaser, the assets covered by a CDA are generally held in an investment account owned by the CDA purchaser.

One risk associated with these products, according to the GAO, is that they are complex and require consumers to make multiple important decisions. For instance, consumers might purchase an unsuitable product or make withdrawal decisions that could negatively affect their potential benefits.

According to several insurers and regulators that spoke with the GAO, it is important for consumers to obtain professional financial advice before purchasing these products and making key decisions. These annuities also can affect insurers’ ability to provide promised benefits to consumers.

VA/GLWBs are considered to be both securities and insurance products, so they are covered by both federal securities regulations and state insurance regulations, but CDAs are considered life insurance products that are subject to state law and regulation of annuities.

This can pose a risk because states differ on how they choose to regulate annuity products. The National Association of Insurance Commissioners has developed state disclosure and suitability regulations for annuity products, but some states don’t have protections at all.

“As a result, consumers in states that have adopted different regulations may benefit from different levels of protection,” the report stated.

The NAIC told the GAO it is currently reviewing the regulations of CDAs. In March 2012, it began reviewing existing annuity regulations to determine whether any changes are needed to address the unique product design features of CDAs, including potential modifications to annuity disclosure and suitability standards.

It also is reviewing what kinds of capital and reserving requirements may be needed to help insurers manage product risk, the report found.

In addition, NAIC and the National Organization of Life and Health Guaranty Associations are each working to determine whether state insurance guaranty funds, which protect consumers in the event insurers become insolvent, cover CDA products. Both agree that each state will have to reach its own conclusion about whether their particular state guaranty fund laws allow for CDA coverage.

Until these regulatory issues are resolved, consumers may not be fully protected.

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