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Consumer Advocate Criticizes Contingent Deferred Annuity Value

A consumer representative ran down a long list of concerns he has about contingent deferred annuities (CDAs) during a conference call with state regulators.

Birny Birnbaum, executive director of the Center for Economic Justice, questioned the consumer value, fee structure, systemicConsumer Advocate Criticizes Contingent Deferred Annuity Value risk issues, consumer protection safeguards, guaranty fund considerations and other aspects of these relatively new types of annuity products.

Until the outstanding regulatory issues can be addressed, he said, regulators should recommend a moratorium on state approval of CDAs.

The heated comments came during a call held by the Contingent Deferred Annuity (CDA) Working Group of National Association of Insurance Commissioners (NAIC).

The purpose was to take comments on 16 or so recommendations that the working group is proposing for regulating CDAs. The regulatory issues have been under the microscope for more than a year.

A CDA is a type of longevity insurance product that can be added to funds in a tax-qualified retirement plan or investment account held outside the annuity insurer. The products are similar to guaranteed lifetime withdrawal benefits in variable annuities in that they guarantee the consumer will receive income for life even if the value of the underlying account drops to zero.

Push Back

A number of annuity industry leaders are in favor of NAIC moving forward on a regulatory plan for CDAs right now, but Birnbaum pushed back hard on that idea.

In public remarks and written comments he later submitted to the working group, Birnbaum blasted away at how little is known about CDAs and how much more research and scrutiny his organization thinks that NAIC needs to do before green-lighting the products.

“It is imperative,” he said, “for regulators to establish that these products can, in fact, be beneficial for consumers, and to establish the regulatory safeguards to ensure the products actually are beneficial to consumers.”

He said his organization agrees that consumers need lifetime income insurance products, but believes that “other, better value products are available” for that purpose.

But if CDA products are to be approved, he said, it is essential that “regulators establish the necessary regulatory structure to ensure fair sales, fair products, solvent insurers and consumer protections.”

Birnbaum’s extensive comments, peppered at times with fiery language – such as, CDAs are a “poor value for consumers,” the products are “risky,” and “consumers cannot afford another regulatory debacle like long-term care insurance” – culminated in multiple requests for NAIC and the working group to obtain more information before deciding to move forward with CDAs. For instance:

  1. Include evaluations and estimates of the benefit ratio of CDAs – i.e., the “ratio of aggregate lifetime CDA benefits to aggregate lifetime fees paid by consumers” and similar details. This is “critical information” for consumers to have in evaluating the value of CDAs, he contended.
  2. Examine and discuss guaranty fund issues before the product is approved for sale. This study should include consumer protection issues and the implications of required assessments on insurers and taxpayers in the event of a CDA insurer insolvency, he said.
  3. Obtain market data on CDAs, such as states that have approved the product, how approvals were done, insurers receiving approval, volume of sales, types of customers and characteristics of CDAs sold to date. This is essential for verifying claims of CDA proponents and for developing the roadmap from the current situation to the final regulatory framework, Birnbaum said.
  4. Conduct NAIC-commissioned consumer testing of CDAs and various required disclosures.
  5. Ensure that any working group report include analysis and discussion of systemic risk posed by CDAs. His organization “strongly” supports having an NAIC level review of “actuarial assumptions, hedge effectiveness, adequacy of enterprise risk management as part of capital and reserving requirements,” he said.

Birnbaum concluded by reiterating his request for no approval of CDAs right now. “We ask,” he said, “that the working group recommend that states place a moratorium on the sales of CDAs until the NAIC and state insurance regulators have substantially completed these tasks.”


Those remarks came as a surprise to others on the conference call, since Birnbaum’s organization had not submitted comments in advance of the session as is customary. The delay in submission occurred because the Center for Economic Justice did not know about the session until just a few days before it occurred, Birnbaum explained to the group.

Still, the question of whether the working group should refer CDA issues out for still more study was very much top-of-mind for industry representatives. The representatives used less flamboyant language than Birnbaum to make points, but counter-push was definitely in motion.

For instance, Lee Covington, senior vice president and general counsel of the Insured Retirement Institute (IRI), said his organization opposes the working group recommendation that referrals be made to other NAIC bodies.

According to the proposed working group recommendations, the purpose of the referrals would be to obtain reviews of reserving requirements, risk-based capital requirements and financial reporting requirements as they relate to CDAs.

“At this time, we believe it is not necessary for the [NAIC Life Insurance and Annuities (A) Committee] to make a formal referral to other NAIC committees,” said Covington, who indicated he was speaking on behalf of not only IRI but also the American Council of Life Insurers (ACLI).

“We believe that a formal referral to any other committees will cause a number of states to withhold review and approval of CDA products until any relevant NAIC committee has reached conclusions,” he said in both written and oral comments.

That will likely happen in one or two years, and as a result, “thousands of consumers” will not have access to CDA products, he predicted.

“Given the absence of a supporting reason,” he continued, “we believe a formal referral for continued evaluation of solvency, which would encompass a review of capital and reserving requirements for CDAs, is not necessary.”

Only a limited number of companies have issued CDAs to date, Covington pointed out. For that reason, “any NAIC committee to which these items would be referred would not have enough actual data to do the requisite evaluation specifically of CDA experience.”

Instead, he said, the working group should explore alternative recommended actions steps with respect to the financial regulation of CDAs.

CDAs Defined

There is one CDA issue about which all parties seemed to be in agreement, at long last. This is the technical definition of CDAs. The proposed working group definition says:

Contingent Deferred Annuity means an annuity contract that establishes a life insurer’s obligation to make periodic payments for the annuitant’s lifetime at the time designated investments, which are not owned or held by the insurer, are depleted to a contractually-defined amount due to contractually-permitted withdrawals, market performance, fees and/or other charges.


In their comment letters, the American Academy of Actuaries, IRI and ACLI all said they agree with that definition. Even Birnbaum, the consumer representative, told the regulators that he agrees with the definition, though he would like to see a definition for consumers too.

As recently as a year ago, some interests were contending that CDAs are financial guaranty insurance policies which are issued by property-casualty insurers. Now, the working group definition seems to have settled the matter: The CDA is as an annuity contract issued by a life insurance company.

Wisconsin Commissioner Ted Nickel, who led the conference call and chairs the CDA Working Group, indicated that the working group will likely vote on the final recommendations at the NAIC spring meeting in April.


Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected] [email protected].

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