May, 2011

Recent activity at the NAIC Life Actuarial Task Force (CATF) level has elevated the topic of Contingent Annuities. These products have been given different names over the past few years, such as annuity wraps, stand-alone GLWBs, and synthetic annuities. The key attribute of these products is that they provide a guarantee of lifetime income in the event that a pool of assets (usually not owned or managed by the life insurance carrier) is depleted as a result of withdrawals and/or poor investment performance. Investment advisors are understandably excited about the potential for such products.

So why are regulators concerned? State regulators are fearful that such contracts may not meet statutory definitions of annuities and may not fall into an existing definition of any financial product. Thus, can life insurers even issue them? Further, some regulators may have approved such contracts without knowing how they are really structured. Other concerns exist as well, such as whether this is a form of financial guaranty insurance. These concerns exist despite the recent IRS input that such contracts meet the federal income tax law definition of an annuity due in part to the strong longevity risk component.

Putting aside the regulatory nuances, one may reasonably ask whether such products are useful in furthering retirement income security for the aging U.S. population. In our view, the existence of Contingent Annuities, while perhaps blurring the lines of what is or isn't an annuity, is simply the next evolution in combining investor control with income guarantees. Let's hope that our state regulatory colleagues take a reasoned approached, and do not throw this baby out with the bath water.

Tim Pfeifer
President