By Sandy Smith, Esq. of Wilson Elser Moskowitz Edelman & Dicker LLP
The National Association of Insurance Commissioners (NAIC) amended its Model Regulation regarding Annuity Disclosure last fall. While to date only one state has enacted the amendments, it is anticipated that states will begin to propose legislation to adopt these amendments in their upcoming legislative sessions. It is important for insurers to understand these new disclosure requirements so that they and their agents can be prepared to comply with the mandates. Additionally, it is essential for insurers to develop comprehensive annuity “point of sale” procedures, given the already enacted suitability and senior-specific certifications regulations and the inclusion of the concepts found in the Annuity Disclosure Model Regulation in the Market Regulation Handbook used by regulators in conducting state examinations of insurers.
With certain exceptions, the amendments to the Annuity Disclosure regulation apply to all group and individual annuity contracts and certificates. While they address delivery of a Buyer’s Guide and a Disclosure Document, perhaps the most significant aspect of the amendments is that specific standards have been set forth concerning the form and content of annuity illustrations. Prior to the enactment of these amendments, insurers did not have to follow uniform standards relative to such illustrations.
The Buyer’s Guide and the Disclosure Document have to be provided to the applicant at the time of sale where such sale is made in a face-to-face meeting. Where the sale is made by a method other than face to face, the Buyer’s Guide and the Disclosure Document shall be sent no later than five (5) business days after the completed application is received by the insurer. The content of the Buyer’s Guide is still under consideration by the NAIC.
The amendments will require that the Disclosure Document contain the insurer’s legal name, physical and website addresses, and telephone number. Also, the Disclosure Document must include certain other information, including, at a minimum, (1) a description of the contract and its benefits emphasizing its long-term nature, (2) specific dollar amounts or percentage charges and how they apply, and (3) information concerning the current guaranteed interest rate or indexed crediting rate formula for new contracts that contains clear notice that the rate is subject to change.
If the insurer decides to provide the purchaser with an illustration, the illustration has to comply with the detailed requirements of the regulation, and such illustration must reference the Buyer’s Guide and the Disclosure Document. The amendments address the illustration of guaranteed and non-guaranteed elements, including that the rate illustrated may not be more favorable than current non-guaranteed elements and may not include an assumed future improvement in such elements. Additionally, the amendments create standards concerning illustration of assumed dates of premium receipt and benefit payouts as well as calculation of indexed-based interest rates and consistency of terminology between the annuity contract and the illustration in terms of surrender and accumulation values. Specific language and information must be included in the narrative and numeric summaries.
With these amendments, the Annuity Disclosure regulation will cover variable annuities such that a Buyer’s Guide must be delivered to variable annuity purchasers along with the above-referenced Disclosure Document (assuming that the Securities and Exchange Commission has not adopted a summary prospectus by the time the Model Regulation is effective). Additionally, new record-keeping requirements will now dictate that insurers or producers must maintain information collected from the consumer and other information provided in the Disclosure Document, including illustrations, for a time period determined by the individual states after the contract has been delivered.
Perhaps the greatest impact that the new illustration requirements will have relates to fixed-indexed annuity products. Specifically, the indexed-based interest rate and account value need to be calculated under three situations: (1) to reflect historical performance of the index for the most recent ten (10) years; (2) to reflect the historical performance of the index for the continuous period demonstrating a “low scenario” as defined in the regulation and (3) to demonstrate a “high scenario” as defined in the regulation. Additionally, the non-guaranteed caps, participation rates or other interest-crediting adjustments cannot be more favorable than the corresponding current element.
The Compliance Plan
In devising a compliance plan to conform to these new illustration requirements, insurers will have to not only address state variations in the Model but also devise a system for illustrating the multiple index options referenced above as well as any market value adjustment features. Additionally, such compliance plans will have to ensure that producers are trained and knowledgeable regarding the new illustration requirements as well as the mandates concerning the Buyer’s Guide and the Disclosure Documents.
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