Insurers that sell fixed annuities have found themselves in a pickle. Investors are buying them like hot cakes, but the low interest rate environment has slimmed their margins considerably. The National Association of Insurance Commissioners has taken steps to ease the pressure on carriers because of the financial solvency risks associated with fixed annuities.
The NAIC this week approved a model state law that would convert the current minimum rates to an index. Until recently, the de facto minimum as established by nonforfeiture laws has been 3%, but under pressure from the insurance industry, some individual states reduced that minimum to 1.5% or have included sunset provisions with the knowledge that the interest rate environment will eventually improve.
The NAIC index is based on the five-year Constant Maturity Treasury rate. Carriers may use a rate within the previous 15 months, minus 1.25%, but no greater than 3% and no less than 1%. The rate for the week ending March 7 is 2.61%, so the corresponding minimum rate would be 1.36%. Equity index annuities may be eligible for an additional rate reduction of 1%.
The importance of the new lowered minimum extends beyond annuities that are surrendered for cash or exchanged for new contracts; the 3% minimum has also represented the lowest offered rate possible, and this has been difficult for many carriers to support. In fact, all carriers have stopped offering fixed annuities with two-year rates because of the low interest environment, and many have also pulled their one-year contracts as well.
The NAICs model law, whose adoption process was fastlaned through the most recent plenary meeting, will likely be adopted by most states as soon as possible. Some states whose legislative sessions have already ended will be amending the law to bills that have already passed, said John Hartnedy, deputy commissioner of the Arkansas Department of Insurance.