Life Bureau Filing Guidance Note

Guidance Date: 07/12/2024

Dual Directional, Dual Step Credit, and Similar Crediting Methods for Non-Guaranteed Index Annuities

The Department has received questions and filings from insurers that wish to offer an innovative equity index crediting method in non-guaranteed equity index annuity contracts authorized by Insurance Regulation 47 (11 NYCRR 50). Under this method, a positive credit is made to the accumulated value even if the index return is negative so long as the return falls between zero and the buffer percentage. The Department provides the following guidance to assist insurers in making submissions containing these new crediting methods.

I. Dual Directional and Dual Step Credit

The Department has seen two variations of this crediting method, which will be referred to in this guidance as “dual directional” and “dual step credit”.

A. With a dual directional crediting method, the credit to the contract is positive when the index return is negative so long as the index return falls between zero and the buffer percentage. The amount credited is typically the positive value of the negative return. For example, if the index return is -3%, the credit to the contract will be 3%. If the index return is -5%, the credit to the contract will be 5%, and so forth, up to the buffer percentage.

B. Within a dual step credit method, a predetermined specified amount will be credited to the contract so long as the negative index return does not exceed the buffer percentage. For example, if the buffer is 10%, step credit is 8%, and index return is -5%, the credit to the contract will be 8%, which is the predetermined step credit.

II. Product Standards and Filing Process

A. Regulation 47 sets forth the standards for maximum buffer percentages, maximum buffer durations, minimum caps, and consumer disclosure applicable to all crediting methods for non-guaranteed index annuities, including the dual directional, dual step credit, and similar crediting methods. See§ 50-2.9(d) of Regulation 47.

B. The “Review & Approval” SERFF Requested Filling Mode should be used. The Circular Letter No. 6 (2004) certified approval process is not available for these submissions unless the Department has given prior permission.

C. The SERFF Filing Description should indicate that the filing contains a dual directional, dual step credit, or similar crediting method and should confirm that a standard crediting method will also be offered in addition to the dual directional or dual step credit method. The SERFF Filing Description should also identify the form number, Department file number and approval date (unless pending) of the form containing the standard crediting method.

D. The addition or modification of crediting methods set forth in a previously approved policy form requires an updated memorandum of variable material or updated list of index options, depending on how variability of investment options was addressed in the original form filing(s), for the previously approved policy forms.

E. The SERFF Filing Description should identify the status of the corresponding Plan of Operation filing to the Life Bureau’s New York City Office. Note that the addition or modification of crediting methods requires a revised Plan of Operation in accordance with Insurance Law§ 4240.

III. Disclosure 

A. Section 50-2.9(e) of Regulation 47 provides that no separate account contract providing non-guaranteed index benefits shall be delivered or issued for delivery in this State unless, no later than at the time of application, the prospective purchaser has been provided with the disclosure form set forth in Appendix 28. The regulation further provides that the disclosure form in Appendix 28 shall not be combined with other disclosure, such as a prospectus, except that it may be combined with the disclosure statement required by Insurance Law § 3209(b)(2).

B. Dual directional crediting methods can be counter-intuitive because the lower the index loss within the buffer, the greater the credit to the contract. In some circumstances, contracts may perform better when there is an index loss than when there is an index gain. However, dual directional and dual step credit methods also have a “cliff effect” where index losses within the buffer result in a credited return, but once negative returns even slightly exceed the buffer, a loss occurs. For example, in a dual directional crediting method, if the buffer is 20% and the index return is -20%, the credit to the accumulated value under the contract will be 20%. However, if the index return is -21% (a difference of only 1%), there will be a -1% reduction in the accumulated value under the contract. The index difference of 1% results in the credit dropping by 21%.

C. Without proper disclosure, these crediting methods have the potential to mislead contract holders and could be prejudicial to the interests of policyholders and unjust, unfair or inequitable. Accordingly, pursuant to Insurance Law § 3201(c), policy forms containing a dual directional, dual step credit, or similar crediting method, cannot be approved unless the Appendix 28 disclosure is expanded to address these new strategies. The following disclosure added as Questions 11 and 12 of the Appendix 28 disclosure are acceptable to the Department for addressing dual direction and dual step credit crediting methods. Other disclosure will be reviewed on a case-by-case basis. As with the other Appendix 28 disclosures, the new items are intended to be general in nature to give consumers an understanding of how this type of crediting method operates. Accordingly, the disclosure is not specific to any particular insurer’s product. Insurers may separately address product specific information elsewhere such as marketing materials.

11. What is a “dual directional” or “dual step credit” crediting method and how is it different from the “buffer” described in Question 4?

• A dual directional crediting method has a buffer against loss with an additional feature that credits your account value a positive return even though there is a loss in the index up to the stated buffer percentage. The positive credit percentage often matches the negative loss percentage. For example, if the buffer is 10% and the index loses 9%, the credited return is 9%.
• A dual step credit method has a buffer against loss with an additional feature that credits your account value a predetermined amount regardless of how much the index gains and also regardless of any loss in the index up to the stated buffer percentage. For example, if the buffer is 10%, step credit rate is 8%, and the index loses 9%, the credited return is 8% which is the step credit rate.
• With a standard buffer, the insurance company will not reduce your account value if the loss in the index is within a stated percentage, but your account value will be reduced for additional loss in the index beyond that initial percentage. The dual directional and dual step credit methods operate similarly. However, the dual directional and dual step credit methods operate differently than a standard buffer because with these strategies, credited returns can be positive even if the market return is negative.

12. What happens if the index loss exceeds the buffer percentage with a dual directional and dual step crediting method?

• With the dual directional, dual step credit, and similar crediting methods, small differences in the index loss can result in large differences in the adjustment made to your account value.
• A dual directional crediting method will treat a negative index change as positive, and credit the positive amount to your accumulated value, only up to the buffer percentage. Once the loss exceeds the buffer, the insurance company will reduce your account value for additional loss in the index beyond that buffer percentage.
• A dual step credit method will credit a predetermined rate – even when the index change is negative – only when the index loss does not exceed the buffer percentage. Once the loss exceeds the buffer, the insurance company will reduce your account value for additional loss in the index beyond that buffer percentage.
• Example: Consider a dual directional crediting method with a buffer of 20%.

A 1% difference in the index loss produces a reduction of 21% in the credit for the period.

Contact

Questions regarding this guidance should be emailed to the Life Bureau.