The  National Association of Insurance Commissioners committee responsible  for life insurance and annuities products has determined CDAs to be life  insurance products subject to state law and regulation for annuities. According to SEC officials, existing CDAs have been registered as  securities with SEC, and therefore are covered by both federal securities  laws and regulations, and state insurance regulations. Features of VA/GLWBs and CDAs May Benefit Consumers but also Pose Risks to Consumers and Insurers

VA/GLWBs and CDAs share a number of features, but they also have  some important structural differences. For example, both provide  consumers with access to investment assets and the guarantee of lifetime  income, but while VA/GLWB assets are held in a separate account of the  insurer for the benefit of the annuity purchaser, the assets covered by a  CDA are generally held in an investment account owned by the CDA  purchaser. In part because of their shared features, these products can  provide similar benefits to consumers. Yet as complex instruments that  require consumers to make multiple important decisions, they also  present certain risks to consumers. 1). That  is, for a fee, they can ensure that consumers receive a minimum annual  payment until they die, regardless of how long they live or how their  investment assets might perform. A unique benefit of these products is that they allow consumers to receive  income guarantees while still maintaining ownership of and access to their  funds during the accumulation and withdrawal phases. Consequently,  once these assets are annuitized the consumer does not have access to  these assets. As a result, consumers can withdraw any or all of their  funds at any time. This can benefit consumers should they need funds for  unexpected uses, such as medical or other expenses. Consumers Face Risks When Purchasing and Withdrawing Funds from VA/GLWBs and CDAs

Several insurers and regulators we spoke with said that VA/GLWBs and  CDAs are complex products, and emphasized the importance of obtaining  professional financial advice before purchasing these products and  making key decisions. These risks include purchasing an unsuitable product,  paying too much, making withdrawal decisions that decrease benefits,  and having an insurer become insolvent before benefits are received. However, SEC officials have  said that CDAs currently being offered in the retail market are being  registered as securities and are therefore covered by federal securities  law and state insurance regulations. According to SEC officials, issuers of CDAs have been  registering offerings of their CDA products with SEC, and SEC is  reviewing the disclosures associated with these products. NAIC Has Developed Annuity Disclosure and Suitability Regulations, but State Adoption and Protection Levels Vary

The NAIC committee responsible for life insurance and annuities issues  considers CDAs to be insurance products and has developed annuity  disclosure and suitability model regulations for use by state insurance  regulators. Consumers in  states that have not adopted NAIC’s model regulations may not be  benefitting from available disclosure and suitability protections. Some industry participants suggest state insurance regulation and  existing actuarial guidance may adequately address risks to insurers  offering CDAs and to consumers. Another industry review by the NOHLGA, NAIC, and state insurance  regulators aims to address whether CDA consumers are protected by  state insurance guaranty funds in the event of an insurer’s insolvency. Officials noted that even when the committee has reached a  determination on guaranty fund protections, each state will have to reach  its own conclusion about whether their particular guaranty fund laws allow  for CDA coverage. Agency Comments

We provided a draft of the report to SEC and NAIC and relevant excerpts  to FINRA. Each provided technical comments that were incorporated as  appropriate. Appendix I: Objectives, Scope, and Methodology

To compare the features of variable annuities with guaranteed lifetime  withdrawal benefits (VA/GLWB) and contingent deferred annuities (CDA),  we analyzed specific insurance company products to obtain information  on how the products function, including how investment gains and losses  are treated, how withdrawal amounts are determined, and what happens  when a consumer’s investment account is depleted. To identify  potential benefits and risks to consumers, we analyzed the product  information we obtained and also interviewed insurers, consumer  advocates, and state insurance regulators. We also obtained data from industry  organizations on the sale of annuity products with guaranteed lifetime  withdrawals. To determine how VA/GLWBs and CDAs are regulated and the extent to  which regulation addresses identified concerns, we identified regulations  and processes used by federal and state regulators, as well as any  proposed regulations, and compared them with the risks to consumers  that we identified as part of the work under the previous objective. We also interviewed other stakeholder groups, such as consumer  advocates and industry organizations, to gain their perspective on issues  related to regulation of lifetime income products considered in our review.
Why GAO Did This Study

As older Americans retire, they may face rising health care costs, inflation, and the risk of outliving their assets. Those entering retirement today typically face greater responsibility for managing their retirement savings than those who retired in the past. Lifetime income products can help older Americans ensure they have income throughout their retirement. VA/GLWBs and CDAs, two such products, may provide unique benefits to consumers. According to industry participants, while annuities with GLWBs have been sold for a number of years, CDAs are relatively new and are not widely available. GAO was asked to review issues relating to these financial products. This report (1) compares the features of VA/GLWBs and CDAs and examines potential benefits and risks to consumers and potential risks to insurers, and (2) examines the regulation of these products and the extent to which regulations address risks to consumers. GAO analyzed insurance company product information, proposed and final rules and regulations, and studies and data related to retirement and product sales. GAO also interviewed federal and state regulators and selected insurers, consumer advocates, and industry organizations.
GAO provided a draft of this report to NAIC and SEC. Both provided technical comments, which have been addressed in the report, as appropriate.

What GAO Found

Annuities with guaranteed lifetime withdrawals can help older Americans ensure they do not outlive their assets, but do present some risks to consumers. Two such products, variable annuities with guaranteed lifetime withdrawal benefits (VA/GLWB) and contingent deferred annuities (CDA), share a number of features but have some important structural differences. For example, both provide consumers with access to investment assets and the guarantee of lifetime income, but while VA/GLWB assets are held in a separate account of the insurer for the benefit of the annuity purchaser, the assets covered by a CDA are generally held in an investment account owned by the CDA purchaser. Consumers can benefit from these products by having a steady stream of income regardless of how their investment assets perform or how long they live, while at the same time maintaining access to their assets for unexpected or other expenses. VA/GLWBs and CDAs are complex products that present some risks to consumers and require them to make multiple important decisions. For example, consumers might purchase an unsuitable product or make withdrawal decisions that could negatively affect their potential benefits. Several insurers and regulators GAO spoke to said it was important for consumers to obtain professional financial advice before purchasing these products and making key decisions. These products can also create risks for insurers which, if not addressed, could ultimately affect insurers' ability to provide promised benefits to consumers.
VA/GLWBs are considered to be both securities and insurance products, and are therefore covered by both federal securities regulations and state insurance regulations. For CDAs, the National Association of Insurance Commissioners committee responsible for life insurance and annuities products has determined CDAs to be life insurance products subject to state law and regulation for annuities. According to SEC officials, existing CDAs have been registered as securities with SEC, and therefore are covered by both federal securities laws and regulations, and state insurance regulations. At the state level, NAIC has developed state disclosure and suitability regulations for annuity products. However, states differ on the extent to which they have adopted these annuity regulations, and some do not have protections at all. As a result, consumers in states that have adopted different regulations may benefit from different levels of protection. NAIC and state regulators told GAO that they are currently reviewing the regulations of CDAs. In March 2012, NAIC began reviewing existing annuity regulations to determine whether any changes are needed to address the unique product design features of CDAs, including potential modifications to annuity disclosure and suitability standards. It is also reviewing what kinds of capital and reserving requirements may be needed to help insurers manage product risk. In addition, NAIC and the National Organization of Life and Health Guaranty Associations are each working to determine whether state insurance guaranty funds, which protect consumers in the event insurers become insolvent, cover CDA products. Both agree that each state will have to reach its own conclusion about whether their particular state guaranty fund laws allow for CDA coverage. Until these regulatory issues are resolved, consumers may not be fully protected.