Archived October 04, 2018
Archived Key Issue
Contingent Deferred Annuities (CDAs) are a new annuity innovation designed to offer longevity riskprotection. These annuities are similar to living benefit riders to variable annuities but, instead of protecting funds or assets chosen by an insurer, the policyholder chooses the underlying investment vehicle, such as a 401(k), mutual fund or managed money account. The CDA establishes a life insurer’s obligation to make periodic payments for the annuitant’s lifetime at the time designated investments, which are not held or owned by the insurer, are depleted to a contractually-defined amount due to contractually permitted withdrawals, market performance, fees or other charges.
A CDA has three distinct phases. First, the CDA goes through an accumulation phase during which the amount of the CDA’s guaranteed annual payment is determined. The amount of the CDA benefit is set as a percentage of the total assets in the separately managed account. As those assets increase in value (for example through investment gains or additional deposits), the CDA benefit amount increases. However, once a benefit amount has been set, the CDA guarantees that the benefit amount can never decrease due to investment losses. In other words, should the underlying assets decrease in value due to poor market performance; the CDA’s benefit amount does not decline. In this way, a CDA provides a guaranteed lifetime income stream should covered assets run out.
The second phase of a CDA is the withdrawal phase in which the participant begins to draw funds from the separately managed account most typically upon retirement. During the withdrawal phase no benefit payments are made under the CDA. The CDA contract sets a maximum periodic withdrawal amount that a participant may take. Withdrawals at or below those permitted by the contract do not affect the benefit level established in the accumulation phase. However, should a participant withdraw funds above the contractually permitted amount, the amount of benefits available under the CDA decreases, potentially all the way to zero.
The third and final phase is the payout or settlement phase. Upon exhaustion of the separately managed account, the CDA begins making periodic benefit payments until the participant’s death. The amount of those payments is based upon the benefit amount set during the accumulation phase less any penalties or reductions for withdrawals above the contractual limits during the withdrawal phase. CDA products sold to date do not include a death benefit.
State insurance regulators, working through the NAIC, have achieved great progress towards establishing a regulatory framework for CDAs. Since the 2012 decision was made to define CDAs as a distinct annuity product best sold by life insurance companies, the CDA Working Group of the Life Insurance and Annuities (A) Committee evaluated the adequacy of existing laws and regulations with regard to contingent deferred annuities (CDAs) and whether additional solvency and consumer protection standards were required. NAIC groups with jurisdiction over the relevant models made recommendations for the revision of several NAIC models to clarify their application to CDA’s.
In 2015 the NAIC adopted revisions to: 1)The Suitability in Annuity Transactions Model Regulation (#275) to specifically reference the product and to make clear producer training requirements include CDAs; 2) the Annuity Disclosure Model Regulation (#245), to specifically exempt CDAs, as the SEC prospectus preempts all other state disclosures; 3) the Advertisements of Life Insurance and Annuities Model Regulation (#570) to specifically referenced CDAs to avoid conflict with FINRA advertising and marketing rules; and 4) the Synthetic Guaranteed Investment Contracts Model Regulation (#695) clarifying that the model was not intended to apply to CDAs. Revisions to the Standard Nonforfeiture Law for Individual Deferred Annuities (#805) to exclude CDAs from the scope of the model have been completed by the Life Actuarial (A) Task Force. Additionally, the Task Force recommended that no changes additions to the NAIC Life Financial Reporting Blank be made at this time and the consideration of the development of tools to assist the states in the review of CDA product filings will continue.
Also in 2015, the NAIC adopted the guidance document titled “Guidance for the Financial Solvency and Market Conduct Regulation of Insurers That Offer Contingent Deferred Annuities” that consolidates all the CDA-related recommendations adopted by the A Committee and serves as a reference for states that are either interested in modifying their annuity laws to clarify their applicability to CDAs or to help states determine how to apply their existing annuity laws and rules to CDAs. The guidance document also addresses scenarios where a CDA contract could be cancelled before the payout phase, resulting in the loss of the CDA benefit. The guidance document recommends a minimum cancellation benefit that should be included in every CDA contract filed after the date the guidance is adopted by the NAIC.
With the completion of revisions to the models and the adoption of the Guidance Document, the Life Insurance and Annuities (A) Committee disbanded the CDA Working Group and agreed that any future CDA-related work will be addressed by the Committee.
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Jennifer R. Cook
Health and Life Policy Counsel