The concerns raised by Alaska and evidenced
in the 2007 changes to their version of the NAIC Standard Nonforfeiture Law For
Individual Deferred Annuities (the Model) are not new.
In the summer of 2004, the NAIC Annuity
Team discussed the fact that a few states had regulatorily implemented a
narrower interpretation of the prospective test of the Model, but that 40+
states were approving products that used the Model language as a guide for
complying with the prospective test. Our mantra at the time was "the Model, the
Model, the Model", but we wanted to be fair about addressing the concerns that
the few states had. Accordingly, a decision was made to have the Interstate
Compact National Standards Working Group (ICNSWG) ask the American Academy of
Actuaries to review the prospective test contained in Section 6 of the NAIC
Standard Nonforfeiture Law and provide an opinion as to the usefulness and
viability of the test in today's deferred annuity marketplace. The Working Group
made such a request in September 2004.
In June 2005, the Academy presented its
report to the ICNSWG. In essence, the Academy found that "the prospective
test is not accomplishing its original objectives in today's environment and
should be eliminated from the uniform product standard compliance requirement
for all deferred annuity products. However, if it were deemed necessary to
continue the prospective test for regulatory reasons, it should only be
applied to products with fixed maturity dates, fixed premium schedules and
corresponding tabular cash values, as it was originally intended."
To continue the fairness approach, the
ICNSWG next forwarded it report to the
Life and Health Actuarial Task Force (LHATF) review the report. LHATF did
meet to discuss the report but no decision was made to proceed to
initiate a project to address the concerns contained in the AAA
Report.
Subsequently, the ICNSWG voted to have the
deferred annuity product standards reflect the language of the Model
relating to the prospective test as it exists in the vast majority of states
rather than the narrower interpretation reflected in the laws or regulations of
only a minority of states.
The Alaska proposed changes are highly
controversial and complex in nature. If the IIPRC standards were revised to
reflect the narrower approach Alaska and a minority of other states have
implemented, there are products used in today's marketplace that would
become nonviable. Understandably, some companies may choose not to
file their deferred annuity products with the IIPRC.
In addition, it should be noted that the
position taken by Alaska and the other states who have regulatorily adopted the
narrower interpretation of the prospective test language in the Model is
contrary to NAIC Actuarial Guideline 3 (AG 3). These states require that
the "Maturity Value" of the deferred annuity equal the policy fund value
(unreduced by surrender charges) at the later of age 70 or 10 years from issue
rather than the being consistent with AG 3 which interprets the Maturity Value
as being the cash surrender value (which reflects the surrender charges) at
that time. Although not a legal mandate and certainly overridden by any state
law to the contrary, AG 3 is contained in the NAIC Examiners Handbook and in the
SSAP's and is therefore important guidance for state examiners as to the
appropriate definition of the Maturity Value as it pertains to the prospective
test in the Model. This guidance has been rendered inapplicable in those states
like Alaska who have adopted the narrower interpretation of the prospective
test.
We do not want Alaska to opt
out of the deferred annuity product standards and we do not want companies not
using the IIPRC for their filings.
We believe that the Alaska
proposed changes should be referred back to the NAIC Annuity Team chaired by
Brad Harker of Pennsylvania. The type of discussions that will be
required are better suited for that Team - there
is broader regulator participation, and the Team is better
prepared to deal with the technical Model and product issues. It is
imperative that more in-depth regulator and industry discussions take place to
properly vet the issues before the standards move up the IIPRC adoption
process.
We will be requesting such referral at
tomorrow's meeting and wanted to give you all a heads up to that
effect.
