UPDATED NAIC ANNUITY DISCLOSURE MODEL REGULATION

BILL DOUGLAS COMPLIANCE MANAGER, INDIVIDUAL ANNUITIES STANDARD INSURANCE COMPANY TAMMY O’CONNOR MANAGER, REGULATORY COMPLIANCE SYMETRA FINANCIAL

OVERVIEW

• Key Concepts

• Disclosure Requirements

• Policyholder Report Requirements

• Illustration Requirements

• Regulatory Issues

• Industry Issues

KEY CONCEPTS • Required Disclosures

– Product Disclosure Document • Minimum information that must be given to an

applicant • Face-to-face solicitation – Must be provided at point of

sale • Other than face-to-face – Must be provided within 5

business days of receipt of application

– Annuity Buyer’s Guide • NAIC publishes this document and states adopt its use.

KY and MI do have variants of the NAICP publication. • Same delivery requirements as Product Disclosure.

KEY CONCEPTS CONTINUED • Policyholder Reports

– No changes in updated Model

• Annuity Illustrations – New section of the Model – Is not required, but identifies numerous

requirements if/when used – Definition: A personalized presentation or

depiction prepared for and provided to an individual consumer that includes guaranteed and non-guaranteed elements of an annuity contract over a period of years

DISCLOSURE REQUIREMENTS • Disclosure and Buyer’s Guide provided at time of

application – If not a face-to-face solicitation:

• Direct solicitation via mail – Must be mailed to applicant within 5 business days

• Internet application – Providing ability to access and print documents on carrier’s website satisfies the 5-business-day requirement

• Must include a statement that documents are available from the Insurance Department or the carrier free of charge

• When not provide at or before time of application, a minimum 15-day free-look period is required (may run concurrent with any other free-look period under the contract)

DISCLOSURE REQUIREMENTS CONTINUED • Generic contract name, company product name

(if different), form number, clearly identified as an annuity

• Company’s legal name, physical address, website address and phone number

• Description of contract and its benefits, including its long-term nature.

• Guaranteed and non-guaranteed elements, their limitations (if any), including for fixed indexed annuities – Elements used to determine index-based interest, e.g.

participation rates, rate caps, spreads; and – Explanation of how they operate

DISCLOSURE REQUIREMENTS CONTINUED • Explanation of initial crediting rate, or for fixed

indexed-annuities an explanation of how the index-based interest is determined, specifying: – Any bonus or introductory portion – The duration of the rate – The fact that rates can change from time to time

and are not guaranteed

• Periodic income options • Any value reductions caused by withdrawals

or surrender • How values can be accessed

DISCLOSURE REQUIREMENTS CONTINUED • The value of the death benefit, if available,

and how it’s calculated • A summary of the federal tax status of the

contract and any penalties applicable on withdrawal

• Impact of any rider, including but not limited to, guaranteed living benefit or long-term care rider

• Specific dollar amount or percentage charges and fees, along with an explanation of how they apply

DISCLOSURE REQUIREMENTS CONTINUED • Information about the current guaranteed

rate, or indexed crediting rate if applicable, that contains a clear notice that the rate is subject to change

• Define terms used in the Disclosure in order to facilitate applicant understanding of the contract under consideration

• OH Disclosure Pilot – http://www.acli.com/Issues/Pages/GR09-

120.aspx?Issue=39

POLICYHOLDER REPORT REQUIREMENTS • Applies to:

– Payout annuities that include non-guaranteed elements

– Deferred annuities in the accumulation phase • Must provide a report to the policyholder, at least

annually, that contains the following at a minimum – Beginning and end date of report period – Accumulation and cash surrender values at the end of

the previous report period and end of current report period

– Total amounts credited, charged or paid during report period

– Amount of any outstanding loans as of the end of the report period

ILLUSTRATION REQUIREMENTS

• Labeled as an illustration

• Statement referring to Disclosure and Buyer’s Guide – Must be accompanied by Disclosure and Buyer’s

Guide at time of application

• If furnished to an applicant under a group contract (or contracts issued to a single applicant on multiple lives), either an individual or composite illustration may be provided.

ILLUSTRATION REQUIREMENTS CONTINUED • May not

– Describe non-guaranteed elements in any manner that is misleading

– State or imply that payment or amounts of non-guaranteed elements are guaranteed

– Be incomplete

• Costs and fees noted and described • Date prepared • All pages number x of y (e.g. 3 of 6) • Assumed premium received and benefits paid

within a contract year

ILLUSTRATION REQUIREMENTS CONTINUED • If age is shown, use issue age plus years in

force

• Clearly identify assumed premium upon which illustration is based

• Cost of rider/features assessed against account value/crediting rate

• Guaranteed death benefit clearly shown and labeled

• Guaranteed surrender benefits clearly shown and labeled

ILLUSTRATION REQUIREMENTS CONTINUED

• Non-guaranteed elements no more favorable than guaranteed elements and must not include any assumed future improvement of such elements

• Non-guaranteed elements used to calculate future non-guaranteed values shall include future planned changes, including planned changes that occur after expiration of an initial guaranteed period or bonus period

ILLUSTRATION REQUIREMENTS CONTINUED

• For indexed annuity – Historical performance of most recent 10 calendar

years – A continuous 10 calendar year period out of past 20

calendar years resulting in highest crediting performance

– A continuous 10 calendar year period out of past 20 calendar years resulting in lowest crediting performance

– If any index used has not been in existence for at least 10 calendar years but less than 20 calendar years, the 10 calendar year period to show the low and high scenarios are to be used from the number of year the index has been in existence

ILLUSTRATION REQUIREMENTS CONTINUED

• Indexed annuities continued… – Non-guaranteed elements (e.g. participation rates,

rate caps, spreads, or other interest calculating adjustments) no more favorable than corresponding current elements

– If allocation to more than one indexed or fixed account is available, the allocation must be the same for all three scenarios and the 10-year periods resulting in the least and most growth performance are to be determined independently for each indexed account option

– Geometric mean annual effective rate of account value growth over 10-year period shown for each scenario

ILLUSTRATION REQUIREMENTS CONTINUED • Index annuities continued…

– The low and high scenarios need not show surrender values and need not extend beyond 10 calendar years

– Graphical representation comparing movement of the three scenarios

• Guaranteed elements shown before non-guaranteed elements

• Reference to page showing guaranteed elements on any page that shows only non-guaranteed elements

• Account value identified by the name the value is given in the contract and shown in close proximity to the corresponding value

ILLUSTRATION REQUIREMENTS CONTINUED • Value upon surrender identified by name the value is

given in the contract and is to be the amount available as a lump sum after deduction of surrender charges, bonus forfeitures, contract loans, contract loan interest and application of MVA, if any

• May show contract benefits and values in graphic or chart form

• Any illustration of non-guaranteed elements must be accompanied by statements noting that: – Benefits and values are not guaranteed – Assumptions upon which values are based are subjec to

change by the insurer – Actual results may be higher or lower

ILLUSTRATION REQUIREMENTS CONTINUED • Illustrations based on non-guaranteed credited

interest and annuity income rates must contain equally prominent comparisons to guaranteed credited interest and annuity income rates, including participation rates, rate caps and spreads

• Annuity income rate not more than the current annuity income rate unless the contract guarantees are more favorable

• Concise; easy to read • Key terms defined and used consistently • No depiction of values beyond the maximum

annuitization age/date

ILLUSTRATION REQUIREMENTS CONTINUED • Annuitization benefits based on contract values

that reflect surrender charges or any other adjustments

• Show annuity income rates per $1000 and the dollar amounts of the period income is payable

• Must include a narrative, to include the following UNLESS provided in the Disclosure provided at the same time as the illustration: – Description of contract features, riders or options,

guaranteed and/or non-guaranteed, shown in the illustration and the impact they have on benefits and values.

ILLUSTRATION REQUIREMENTS CONTINUED • Narrative Requirements continued…

– Description of other optional benefits or features not shown in the illustration and the impact they have on benefits and values

– Identification and brief definition of column headings and key terms used in the illustration

– A statement as follows (in substance) • Fixed non-indexed annuities

– This illustration assumes the annuity’s current non-guaranteed elements will not change. It is likely they will change and actual values will be higher or lower than those in this illustration, but will not be less than the minimum guarantees. The values in this illustration are not guarantees or even estimates of the amounts you can expect from your annuity. Please review the entire Disclosure Document and Buyer’s Guide provided for more detailed information.

ILLUSTRATION REQUIREMENTS CONTINUED

• Narrative Requirements continued… • Fixed indexed annuities

– This illustration assumes the index will repeat historical performance and that the annuity’s current non-guaranteed elements, such as caps, spreads, participation rates or other interest crediting adjustments, will not change. It is likely that the index will not repeat historical performance, the non-guaranteed elements will change, and actual values will be higher or lower than those in the illustration, but will not be less than the minimum guarantees. The values in this illustration are not guarantees or even estimates of the amounts you can expect from your annuity. Please review the entire Disclosure Document and Buyer’s Guide provided for more detailed information.

ILLUSTRATION REQUIREMENTS CONTINUED • Narrative Requirements continued…

– Additional explanations • Minimum guarantees • Effect of surrender charges on contract values • Any conditions on payment of bonuses • IRAs, qualified plans or other arrangements subject to RMDs

– The effect of RMDs on contract values • If recurring surrender charge schedules, explanation of

circumstances that cause surrender charges to recur • Types of annuity income options available, including

– Earliest or only maturity date – If option maturity dates, the periodic income amount for at least one of

the annuity income options, based on guaranteed rates, at the later of age 70 or the 10th contract year, but no later than the maximum annuitization age/date

– If fixed maturity date, the periodic income amount for at least one of the annuity income options, based on guaranteed rates, at the fixed maturity date

ILLUSTRATION REQUIREMENTS CONTINUED

• Following the Narrative, must include a numeric summary that includes, at a minimum, the numeric values for the following durations: – First 10 contract years or surrender charge period

(including any renewal surrender charge periods), whichever is longer

– Every 10th contract year for 30 years or up to age 70, whichever is later

– Required annuitization age/date

ILLUSTRATION REQUIREMENTS CONTINUED • Plans that contain a Market Value Adjustment

(MVA) – The MVA must be referred to throughout the

illustration – The narrative must include an explanation of the

potential effect of the MVA on the surrender value and the death benefit

– A statement as follows, in substance: • When you make a withdrawal, the amount you receive may

be increased or decreased by a Market Value Adjustment (MVA). If interest rates on which the MVA is based go up after you buy your annuity, the MVA likely will decrease the amount you receive. If interest rates go down, the MVA will likely increase the amount you receive.

ILLUSTRATION REQUIREMENTS CONTINUED

• Plans that contain an MVA continued… – Describe both the upside and downside aspects of

the contract features relating to the MVA

– Illustrative effect of the MVA is to be shown for at least one positive and one negative scenario. The demonstration is to appear on a separate page and be clearly labeled that it is information demonstrating the potential effect of an MVA

– MVA floors and ceilings are to be illustrated

– Any additional MVA effects not noted above

ILLUSTRATION REQUIREMENTS CONTINUED

• Illustration’s Narrative for fixed indexed annuities must include the following, UNLESS provided in the Disclosure: – Explanation of the elements used to determine

the index-based interest, including: • Index(es) used • Index method, e.g. point-to-point, monthly averaging,

etc. • Index term • Participation rate • Rate cap • Spread

ILLUSTRATION REQUIREMENTS CONTINUED • Narrative requirements for fixed indexed

annuities continued… – Explanation of how index-based interest is credited to

the indexed account(s) – Brief description of the frequency the company may

reset elements used to determine index-based credits – If product allows the contract holder to allocate funds

to a fixed interest account, include: • Description of options to make allocations to the fixed

interest account for both new premium and transfers from the indexed interest account

• Description of differences in guarantees applicable to the fixed interest account and the indexed interest account

ILLUSTRATION REQUIREMENTS CONTINUED

• For fixed indexed annuity, the numeric illustration must include, at a minimum: – The assumed growth rate of the index

– The assumed values for the participation rate, rate cap and spread

– The assumed allocation between fixed interest account(s) and indexed interest account(s)

• If a contract is issued other than that applied for, a revised illustration is to be sent with the contract

REGULATORY ISSUES

• Are producers and companies already illustrating, especially deferred annuities?

• Ensuring that essential information is provided

• Consistent format so that comparisons are easy to make and easy to read

• To facilitate sufficient understanding by consumers to make informed decisions

INDUSTRY ISSUES • Provide essential information in a format that is useful,

easy to read and understand, and facilitates consumers making informed decisions – What information is “essential”? – Is there a point at which there is too much information, i.e.

the onslaught of information is too much for a consumer to digest?

• Is there a need to provide illustrations when we have Disclosures and regulated marketing materials? – Generally needed for immediate annuities, but are

illustrations needed for deferred annuities?

• Company management/oversight of illustrations • Cost