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. 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. But use of this structure is likely to continue for a while because of the need for state adoption of the NAIC’s change.Īnnouncements from the Interstate Insurance Product Regulatory Commission (i.e., the Compact) 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. This 1% interest is guaranteed for the life of the contract, and this secondary value assures that the product complies with the SNFL.Ĭarriers 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. It is typically 87.5% of the premium, less any withdrawals, accumulated at 1% interest. A nonforfeiture value, which is a secondary value under the contract.We have seen guarantees as low as 0.05% from companies such as New York Life, Principal, and United of Omaha. This value does not have a 1% minimum guarantee. It is 100% of the premium accumulated with interest, less any withdrawals. An account value, which is the primary value under the contract.Many fixed annuity products now have two values: But such a guarantee has become less common today. Instead, they were making product design changes to weaken that guarantee as much as possible under the SNFL.įor 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%. 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. How companies have been modifying their product designs to lessen risk The result is that implementation for insurance companies and fraternal benefit societies is not straightforward. However, the NAIC adopting this change unfortunately does not actually cause it to go into effect in any state. The December 2020 change made it so that the resulting rate can now be as low as 0.15%. The final, resulting rate previously could be 1%, but no lower. 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. 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). 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. 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.
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