IIPRC REQUEST FOR COMMENTS: FRAMEWORK FOR GROUP ANNUITY STANDARDS August 15, 2012

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1 IIPRC REQUEST FOR COMMENTS: FRAMEWORK FOR GROUP ANNUITY STANDARDS August 15, ) The variety of Uniform Standards needed for group annuity products and the interaction between multiple standards (if any). For example: a. Should the standards have a core with additional standards for specific benefit features (as with the Individual Annuity standards) or should sections of the standards address specific benefit features (as with the Specialized Products/Marketing section of the Individual Adjustable Life standards)? c. Should there be separate standards for allocated and unallocated products? Deferred, immediate and longevity? Fixed and variable? Separate and general accounts? 2) The scope of each of the Uniform Standards suggested in items 1) above. We believe that it makes good sense to develop CORE standards for allocated products and CORE standards for unallocated contracts. However, there will be a need to accommodate fixed and variable of each and separate accounts and general accounts of each, as well as any combination of fixed, variable, separate accounts and general accounts. The allocated set of standards would need to accommodate: Group Annuities GICs Synthetic GICs Terminal Funding/Closeouts Funding Agreements*. The unallocated set of standards would need to accommodate: Group Annuities GICs Synthetic GICs Funding Agreements*. *Not all states allow these as insurance contracts, but we agree with the approach taken by Iowa, as exemplified in Iowa Code A(2012). We also suggest that the IIPRC survey its members to determine the likelihood of filing these with the IIPRC. A separate set of standards should be developed for group annuity contracts subject to individual requirements, on a deferred and immediate basis. 1

2 b. Treatment of policy vs. certificate form requirements? There is a group annuity contract and a Policyholder application. Sometimes, the application sections are included as part of the contract so only one signature is needed. For unallocated contracts, certificates are issued at the time of annuitization only. However, some insurers may issue to each participant a confirmation of plan participation which includes no benefit details. For allocated contracts, if required by a state, a confirmation of plan participation which includes no plan detail is issued to all plan participants on the effective date of the group annuity contract, as well as to plan participants as they enroll. At annuitization, certificates are issued to provide an immediate annuity with either a fixed or a variable payout, or a deferred annuity with a fixed or variable payout. Eligible participants are enrolled in the sponsor s plan in accordance with the plan requirements. The enrollment form is used to enroll in the sponsor s plan and to enroll in the group annuity contract. As was the case with group term life enrollment forms, these forms are census driven to provide administrative details and are not required today to be filed for approval. As for readability, group annuity policies are generally exempt. In a few states, certificates are subject to readability requirements. d. What types of benefit features should be addressed? Market value adjustments, index-linked investment options, Guaranteed Living Benefit options or others? All of the examples given may be applicable to some products. The annuitization options can be fixed only, variable only, or fixed and variable. 3) Definitions for use in the Uniform Standards. Each product may require its own unique definitions. The typical terms that are defined are: Account Charges Additional Services Allocated Beneficiary Business Day Calendar Day Internal Revenue Code of 1986 Certificate Contractholder Contractholder Account Contractholder Fixed Account Contractholder Variable Account Contributions 2

3 Effective Annual Rate Fixed Accumulation Fixed Annuitization General Account Instruction in Good Order Insurance Company Participant Participant Account Plan Plan Investment Fund Rate Segment Separate Account Spouse/Domestic and Civil Union Partners Subaccount Transfer Payment Unallocated Unit Unit Value Variable Accumulation Variable Annuitization Withdrawal Withdrawal Date Withdrawal Value 4) Key provisions for the Uniform Standards. This request is focused on the framework for group annuity standards. The Commission intends to provide opportunity in later stages of the advance rulemaking process for comments about specific provisions of the Uniform Standards; however, comments on key provisions in general are welcome at this stage as well. Each product may require its own provisions. The typical ones that are included are: Adjustment to Annuity Payments Annual Reports Annuities Available Under the Contract Annuity Commencement Date Annuitization/Annuity Settlement Options Arbitration Assignment Benefit Payments Certificate Delivery and Validity Changes to Conform to Law Charges Conclusive Reliance of Information Contract Changes Contract Liability Contributions 3

4 Deferral of Payment Discontinuance of Contributions under the Contract Entire Contract Grace Period Incontestability Information-Records Investment Accounts Loans/Plan Loans Misstatement of Age or Sex Participating/Dividends Plan Changes Reinstatement Services Specifications Page Suspension/Recommencement of Annuity Payments Termination of Contract Transfers Unenforceable Provisions Waiver of Surrender Charges Withdrawals 5) Actuarial submission requirements. As with key provisions for the Uniform Standards, the Commission intends to provide opportunity in later stages of the advance rulemaking process for comments about specific Actuarial Submission requirements; however, comments on actuarial submission requirements in general are welcome at this stage as well. The majority of the states today do not require any since there is no nonforfeiture requirements for group annuities (other than those using individual standards). In the past 5 years, the following actuarial items were requested: California Bulletin 95-B MVA issues [CT, DE, FL] 457, 403(b) and 401a: surrender charge issues [CT] For Separate Accounts and GICs: MD has maximum asset charge For Separate Account and GICs: Bulletin compliance (RBC, reserves, etc.) [MO] GLB: illustration, with cost and adjusted accumulation values and death benefit at each durations through age 65 (DE) 4

5 Funding Agreements: asset maintenance requirements for MV separate accounts; plan to conform to Appendix A-822 to demonstrate adequacy of account assets based on cash flow analysis [DE] Funding Agreements: questioned MVA [CT,IN] Funding Agreement: add statement to the actuarial memo re: exempt from nonforfeiture [MS] GICs: requested nonforfeiture compliance company explained it does not apply) [MS] Discretionary Group Filing: compliance with SNFL questioned [MS] Discretionary Group Filing: required actuarial certification that reserves are calculated by required method [NC] Discretionary Group Filing: required actuarial certification that reserves are calculated by required method [NC] Compliance with SNFL questioned (CT, FL] Unisex rates; actuarial tables used in pricing; reserves, mortality basis, annuity purchase rates [MA] Product guarantees and reserve questions [IL] Reserve questions, nonforfeiture requirements, how charges function under the contract [FL] Reserves, standards valuation law, asset adequacy [MN] Standard valuation law, asset adequacy, risk management [NH] Unallocated group annuity: availability, contributions, fees, benefits, annuity purchases, reserves, demonstrations [NC, FL, MN, MS OH] Unallocated group annuity: statement for exemption from compliance [IL] Synthetic GICs: requested demonstrations of compliance with Model Reg (Appendix A-695) with specific attention to Plan of Operations, details of the segregated portfolio, reserves and documentation with focus on asset maintenance reqs for segregated portfolios [DE, MN] GICs: requested an actuarial memo and a description of withdrawals and benefits to participants [DE] 5

6 6) General submission requirements, such as readability scores, statements of variability, various certifications from officers. As with key provisions and actuarial submission requirements for the Uniform Standards, the Commission intends to provide opportunity in later stages of the advance rulemaking process for comments about specific general submission requirements; however, comments on general submission requirements are welcome at this stage as well. 7) The IIPRC process for review of products, or components thereof, under the group annuity Uniform Standards, including the extent of use of the IIPRC s Rule for Self-Certification of Product Components Filed with the IIPRC. Commenters should provide information on the current state-by-state filing process across the Compacting States including how product submission, regulatory review and implementation processes are impacted based on the type of state review process for group annuities (ranging from prior approval to exemption) and the advantages and disadvantages to each type of state review process. We recommend that the IIPRC survey its members for current authorization for terminal funding/close out products and determine if these products can be filed with the IIPRC. We recommend that the IIPRC survey its members to determine which states have extraterritorial jurisdiction and to what extent (informational filing only; prior approval). We recommend that the IIPRC survey its members for current filing requirements (these should be based on current published requirements, not preferences) for: allocated group annuity policies (other than those listed below) unallocated group annuity policies (other than those listed below) group annuities using individual standards GICs Synthetic GICs Terminal Funding/Close Out Products Given that these products are subject to various federal regulation/oversight and the plan sponsor has fiduciary responsibilities under federal law, some states do not require filing, but some do. No two companies have the same experience. The IIPRC should survey its members and determine, for each product, the current filing process required: Prior approval required for the above? File and use procedures for the above? File as exempt procedures for the above? Self-certification procedures for the above (such as NY, IL)? Filing not required for any of the above? To the extent possible, the companies want the use of self-certification filings for the products, with the exception of group annuities using individual standards which have always been filed for prior approval. 6

7 Given that the filing of certificates is viewed differently by the states, the IIPRC should survey its members to determine the current requirements for each member state (these should be based on current published requirements, not preferences). As mentioned above, group annuity policies are generally exempt from readability requirements due to sophisticated buyer Policyholders, but in a few states where certificates are required to be filed, the certificates are subject to the readability requirements. The IIPRC needs to survey its members 8) Any other pertinent information or issues, including specific federal or state legislative, administrative or regulatory references, regarding product design and product content requirements as well as current product filing regulations, processes and requirements for group annuities products that may assist the Commission as it considers the framework, scope and definitions that should be used in the development of group annuity Uniform Standards. The group annuity companies have the following issues/concerns about how the IIPRC will handle the Group Annuity product line: Eligible Groups Today s products are sold to single and multiple employers, labor unions and associations. Products are also sold to customers of financial institutions, and because many states have yet to recognize this group, as New York does, this group is treated as discretionary in many states, thereby subjecting the filings to more intensive scrutiny and slowing down the review process. If the IIPRC can accommodate these groups, including customers of financial institutions, this would serve to eliminate the discretionary group issues and make the IIPRC attractive for the companies that need market flexibility. Self-Certification Companies selling group annuity products need to be able to secure approval fairly quickly, sometimes in a couple of days when pension plan assets are being transferred, huge amounts of money remain in dormant accounts until the company has approval to issue and accept the risk. For practical reasons, plan sponsors want the transfer plan assets to be ASAP and if a company cannot do this, the sponsor will look for a company that can. If the IIPRC can develop standards and a process that is conducive to the group annuity markets, the companies will use the IIPRC. If the IIPRC slows down the process, the companies will not use the IIPRC. 7

8 Variability and Single Case Filings Like all group products, group annuities need to be able to identify variable material and provide an explanation of how each item will vary. As previously mentioned above, speed to market is a critical factor, so companies need the flexibility to adapt previously approved/certified forms to meet the sponsor s plan specifications. The group term life variability (definitions, periods of time, percentages, numerical values, benefits available, benefit schedules and amounts, eligibility rules and other plan parameters that are subject to the Policyholder s plan design) is a good starting point. Today, because some states do not allow variable material to the extent needed, companies make many single case filings to expedite the approval/certification process since the language filed applies to only one case, states fast-track the review of these filings. If the IIPRC can allow flexibility in variable material, the companies will have a greater incentive to file with the IIPRC and reduce/eliminate the need for single case filings. Mix and Match As was the case with Group Term Life, group annuity product portfolios are quite old the basic policy and certificate chassis get recycled through the years, with new annuitization options, or regulatory requirements added. A mix and match approach would encourage the group annuity companies to begin filing what is currently needed to update older portfolios, and gradually the companies would file the other components of their portfolios. Group Annuity Requirements vs. Life Requirements Very few states have statutes and/or regulations specific to group annuity products, and in some states the life requirements are misapplied to group annuity filings. To the degree that the IIPRC can develop standards that are specific to group annuity products, this will provide a great incentive to file with the IIPRC. Plan of Operations The IIPRC needs to determine how to handle the filing of plans of operations. The IIPRC should survey its members to determine what is feasible. To the degree that the IIPRC can accommodate a one stop shop filing process, there will be a greater incentive for the companies to use the IIPRC. Extraterritoriality As is true for Group Term Life standards, a group annuity policy issued in one jurisdiction, with participants in other jurisdictions, needs to comply with various extraterritorial requirements of some states, some of which are Compacting States and some of which are not. It would be helpful if, for at least those states that are Compacting States, a company could rely on its IIPRC filing as satisfying the extraterritorial filing requirements in the Compacting States with such requirements. Of course, if the IIPRC can develop national standards that would eliminate some, if not all, state variations, this would simplify the extraterritorial filing needs. A national standard in this regard would provide the greatest incentive for the companies to use the IIPRC. 8