At Miller & Newberg, we make every effort to alert our clients to industry developments that are very important for insurance companies and fraternal benefit societies to know and act upon.
In recent years, as interest rates have fallen to record lows, the annuity industry has become increasingly concerned about the lifetime interest rate guarantees in its products.
In a response that is meant to address those concerns for new business going forward, on December 9, 2020, the National Association of Insurance Commissioners (NAIC) adopted a change to the minimum interest rate mandated in the Standard Nonforfeiture Law for Deferred Annuities (SNFL).
The SNFL states that on a deferred annuity, the minimum interest rate used in determining nonforfeiture benefits is calculated using the five-year Treasury rate less a spread specified in the law. The final, resulting rate previously could be 1%, but no lower. The December 2020 change made it so that the resulting rate can now be as low as 0.15%.
This is good news for the industry. However, the NAIC adopting this change unfortunately does not actually cause it to go into effect in any state. The result is that implementation for insurance companies and fraternal benefit societies is not straightforward.
How companies have been modifying their product designs to lessen risk
In recent years, as annuity carriers became more concerned about the riskiness of a 1% lifetime interest rate guarantee, they weren’t waiting for the NAIC to take action. Instead, they were making product design changes to weaken that guarantee as much as possible under the SNFL.
For example, if you were to go back five years ago or so and look at most carriers’ fixed annuities, you would see that they guaranteed that the interest rate being credited to the contract’s account value would never fall below 1%. But such a guarantee has become less common today.
Many fixed annuity products now have two values:
- An account value, which is the primary value under the contract. It is 100% of the premium accumulated with interest, less any withdrawals. This value does not have a 1% minimum guarantee. We have seen guarantees as low as 0.05% from companies such as New York Life, Principal, and United of Omaha.
- A nonforfeiture value, which is a secondary value under the contract. It is typically 87.5% of the premium, less any withdrawals, accumulated at 1% interest. This 1% interest is guaranteed for the life of the contract, and this secondary value assures that the product complies with the SNFL.
Carriers provide a guarantee that if the account value less surrender charge and any market value adjustment is less than the nonforfeiture value, then the nonforfeiture value is used as the cash surrender value.
If the 0.15% minimum rate language in the SNFL were universally in effect, we would probably see companies no longer using this two value design structure, as it is a bit complex for consumers to understand and for companies to administer. But use of this structure is likely to continue for a while because of the need for state adoption of the NAIC’s change.
Announcements from the Interstate Insurance Product Regulatory Commission (i.e., the Compact)
Most carriers today file their products for approval with the Interstate Compact, so they view the key implementation question to be whether or not the Compact will accept and be able to approve annuity product filings with a 0.15% guarantee.
On December 4, 2020, anticipating a few days in advance the NAIC’s adoption of the lower interest rate, the Compact invoked a 120-day stay in accepting product filings with a 0.15% guarantee. Their concern was a question as to whether they had authority to approve such filings on behalf of states that have not individually adopted the NAIC’s change to the SNFL. And, it turns out, they don’t have that authority!
On March 23, 2021, the Compact issued an update. It announced good news, that it would begin accepting filings with 0.15% guarantees. However, it specified that products filed with the Compact must comply with each state’s SNFL. Therefore, companies wishing to use a rate below 1% must bracket the rate in their product filing so that it is a flexible field. Companies must certify in their Actuarial Memorandum for the product that “The nonforfeiture rate will be no lower than the rate prescribed in the law of the state where the policy is delivered or issued for delivery.”
Therefore, even after the Compact has approved the product, the 0.15% rate, or any rate below 1%, can only be used after the state of issue has adopted the NAIC’s change to the SNFL.
Implications for Insurance Companies and Fraternal Benefit Societies
At this point, if a company is concerned about the riskiness of offering a 1% lifetime interest rate guarantee on their annuities, we recommend a two-pronged approach.
In the short term, until a given state has adopted the NAIC’s change to the SNFL, the industry’s two value design approach continues to work. Using a secondary guarantee of an underlying nonforfeiture value gives your company the weakest interest rate guarantee allowable under current law. It allows your company to have credited rates below 1% from time to time, even potentially for many years, before the nonforfeiture value starts to exceed the account value less surrender charge.
In the long run, we recommend creating updated filings for the Compact using the 0.15% interest guarantee. As states adopt the NAIC’s change to the SNFL, the change applies on a going forward basis to any filings approved by the Compact that use the flexible field approach described in their March 23, 2021 update.
Whenever you are ready to take action, your actuaries at Miller & Newberg are here to help you manage risk and grow your sales by updating your existing annuity products or creating new products.