Some advisors avoid annuities because they say they are complicated. Some say they are expensive. The reasons for not recommending annuities to a particular are many and varied. But experts insists that carrier defaults—that is, the fear an insurance company might fall on hard times and become unable to honor its obligations to annuitants—should not be one of them.
“The industry has an unparalleled record of delivering on its promises,” said Jim Szostek of the American Council of Life Insurers (ACLI), an industry group in Washington, D.C.
Every state in the U.S. maintains strict regulations over how carriers’ assets are held and invested, he said. Insurance companies’ financials are “closely monitored” by state insurance commissioners, he said, who “step in to take corrective actions” at the first hint of trouble. Carriers cannot do anything too risky with customers’ money. They are also required to keep a capital cushion in case the system is stressed. The overwhelming majority of annuity providers meet or exceed these reserve requirements, according to those familiar with the data.
To be sure, annuities are not insured by the FDIC. But insiders say the regulatory guidelines, established by the National Association of Insurance Commissioners (NAIC), are stricter than federal rules governing banks and pension plans.
Nevertheless, problems can and do occur. Experts, however, say most headline-grabbing insurance failures involve long-term care or property and casualty operations, which are impacted by unexpected calamities that annuity businesses are largely immune to. Even in the aftermath of the financial crisis, between 2008 and 2015, not one provider with outstanding annuity obligations defaulted, according to the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) in Herndon, Va.
Still, Sean McKenna, NOLHGA’s director of communications, cited two annuity defaults from the early 2000s. First, London Pacific Life & Annuity Co., a Raleigh, N.C.-based subsidiary of a U.K. insurance group, defaulted on nearly $2 billion in annuity obligations. Around the same time, Standard Life Insurance Company of Indiana went bust on some $1.7 billion in policies and financial obligations.
In both cases, stakeholders were left waiting several years for a resolution. But ultimately, he said, both companies were bought up by other insurance carriers, who made good on the obligations. All annuity holders were made whole.
More recently, he added, the annuity subsidiaries of Global Bankers Insurance Group are scheduled to go into liquidation later this year.
These cases, though, are outliers, McKenna insisted. “Annuity defaults are rare,” he said. “Only a handful of companies with significant annuity business have failed in the last 25 years.”
Nonetheless, it’s prudent to do some research before recommending or buying an annuity, especially if you’ve never heard of the carrier, advisors say. One suggestion is to check a provider’s credit rating with A.M. Best, Standard & Poor’s, and Moody’s before buying. “As with any financial product, consumers should do their due diligence,” said Szostek.
Of course, there can still be holes in the system. So, just in case, every state and the District of Columbia and Puerto Rico also maintain an insurance guaranty association to further ensure that carriers’ obligations are met, said McKenna. “The guaranty system is strong,” he said, with a long “track record” of keeping carriers afloat.
Each guaranty association covers at least $250,000 in annuity benefits, according to NOLHGA data. That’s a minimum, not a cap. In New York, New Jersey, Connecticut, and Washington state, aggregate defaults must amount to at least $500,000 to be covered. There are no maximum limits to this stopgap coverage.
Still not convinced? Industry experts say that another factor bolstering the solvency of annuity providers is the reinsurance industry. Reinsurance companies essentially provide backup insurance for insurance carriers. They are contracted as a sort of hedge against the risk that carriers’ actuarial assumptions don’t work out.
For instance, an annuity holder might outlive expectations and leave the carrier on the hook for more years of payouts than originally anticipated (or priced into the annuity contract), explained Ben Blakeslee at Munich Re Life US. Reinsurance can help insurers “balance their mortality and longevity risk,” he said, referring to the possibility that life insurance owners die sooner than predicted, in which case death benefits are due sooner than anticipated, or annuity holders live longer than projected and end up “receiving more annuity payments than expected.”
Reinsurers, he said, have “a broad view of the insurance landscape and can leverage and analyze extensive data sources.” This is especially important, he added, for defined-benefit retirement plans, where relatively little is typically known about individuals stakeholder’s health and longevity. Having a reinsurance company back up the benefits provider’s obligations gives “additional protection to policyholders,” he said.
Reinsurance “spreads out risks that a single company may face when it comes to large payouts,” said Szostek, and can play a significant role in making sure that carriers’ promises are fulfilled.