Grab Bag -- Solvency Concerns, Member Kudos, Capitol Insights
February 8, 2012Regulators Raise Solvency Concerns Over Increasing Annuity Exposure Last week, Alliance members licensed to do business in New York received a Bulletin alerting them to some concerns expressed by New York regulators about the potential negative on an organization’s financial health as a result of rapid growth in annuity sales. I thought some of these regulators’ comments were worth passing on to a broader audience of Alliance members, because these concerns are no doubt shared by others in the relatively small regulator community. Here is a summary of the key points raised by New York regulators:
- Regulators indicated that the societies about which they are most concerned are those that have seen significant growth in annuities with high guaranteed rates of return. Those that have attracted the most regulatory attention are societies whose new annuity premium exceeds their surplus.
- Regulators are especially concerned because better-capitalized commercial insurers are not taking on such risks at the same accelerated pace of fraternals. Regulators report that most commercial insurers have slowed their growth in annuities by reducing their guaranteed rates of return to 1%.
- Regulators have contacted the societies they are most concerned about regarding their annuity exposure. Regulators are encouraging these societies to reduce their guaranteed rate of return on annuities, mirroring the action taken by commercial insurers. Regulators have found that those societies using outside investment advisors are more aware of the threat that overexposure to annuities can have on the organizations' financial condition, and are voluntarily taking action to slow down the growth in annuity business.
- During these meetings with society leaders, regulators are challenging the actuarial assumptions the society uses to establish rates of return and business retention. Regulators believe that many of these assumptions - particularly those about the retention rates of these certificates should interest rates rise rapidly - are overly optimistic.
- Regulators expressed concern about the awareness that these new annuity certificate holders have regarding the fraternals’ social mission or the ability of societies to assess members for any financial shortfalls.
- Regulators are more concerned about the risk of "pop-up" interest rates - a rapid jump in rates that could result in the rapid loss of much of this newly written annuity business. Such a development could leave societies insolvent or require them to assess members, presenting a significant risk to the society, its members, and the fraternal system.