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Life Health > Annuities

What If the Index in an Indexed Annuity Goes Away?

By Allison Bell

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For life and annuity advisors, the current financial storm raises a new question: What if U.S. life insurers continue to do well, but the firms that produce some of the indexes inside indexed life and annuity products go away?

Credit Suisse, for example, has been producing the Credit Suisse Momentum Index, a global, multi-asset index that’s used in some individual indexed annuities.

UBS agreed over the weekend to take control over Credit Suisse through a transaction that UBS Chairman Colm Kelleher called an emergency rescue. The transaction could affect the Credit Suisse index program unit, and any derivatives market activities related to the indexes. Even if UBS or another entity takes over the Credit Suisse index unit, it could decide to drop some indexes because of factors such as shifts in customer demand.

Other organizations could also drop specific indexes, or index programs, because of lack of customer interest, a change in corporate strategy, difficulties with finding good index program managers or other considerations. What then?

Ann Young Black, the co-chair of the life, annuity and retirement solutions team at Carlton Fields answered questions via email about how she sees the general question of what happens when index providers drop indexes.

Black has been working in the area of insurance law since 1991. She has experienced the spike in interest rates that hit in 1994, the 1995-2002 tech company bubble and bust, and the 2007-2009 Great Recession.

She helps life insurers design index-linked products and meet state insurance regulators’ filing requirements.

Our questions and her answers have been edited.

THINKADVISOR: Does the typical indexed annuity contract or indexed universal life insurance policy say anything about changes in the indexes used to set the crediting rates?

ANN YOUNG BLACK: Many fixed indexed annuity (FIA) and indexed universal life (IUL) policies include provisions that allow the insurer to cease offering new segments of an index crediting option.

Thus, once a segment of the particular index crediting option reaches the end of its term, the owner would need to select one of the other available index crediting options available under the owner’s contract.

This would allow an insurer to cease offering an index crediting option based upon an index that may no longer be available.

What kinds of arrangements do typical indexed life and annuity product issuers have with index providers?

In the agreement with an index provider, an insurer will try to require that an index provider continue to make an index available until the end of all outstanding segments of the index crediting options based on the provider’s index.

This, coupled with the contract or policy provision for index crediting option changes, allows for the orderly transition with respect to an index.

Have state insurance regulators prepared for the possibility of index option changes?

State regulators through the Interstate Insurance Product Regulation Commission (IIPRC) have also addressed this situation.

In particular, the IIPRC standards for FIAs, IULs and variable annuities with index account option require these contracts to include a provision addressing the following:

…. what occurs when any index is discontinued or the calculation of an index is substantially changed, [and ] the provision [must be] labeled as such.

[It must also] state that if the index is discontinued or if the calculation of the index is changed substantially, the company may substitute a comparable index subject to approval by the Interstate Insurance Product Regulation Commission.

[Finally, the] contract shall also specify that, before a substitute index is used, the company shall notify the owner and any assignee of the substitution.

Do typical indexed annuity and indexed universal life policies include the kind of provision described in the IIPRC standards?

Many FIAs and IULs set forth the required IIPRC standard language.

However, some may also specify what happens if there is a substitution — i.e., how the substitution impacts the values used to calculate the indexed-based interest.

This article has been updated to reflect the UBS agreement to acquire Credit Suisse.

(Image: ASTA Concept/Shutterstock)

Allison Bell

Think_Allison

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