Life Bureau Filing Guidance Note

Minimum Cap Rates for Non-Guaranteed Index Annuities Under §50-2.9(d)(5) of Insurance Regulation 47

Guidance Date: 07/12/2023

Equity interest credited to non-guaranteed index annuities is usually limited by a “cap” specified in the contract. Section 50-2.9(d)(5) presents minimum cap rates that are “net of fees.” The following guidance clarifies the treatment of “margins” and “contract charges” in this context.

Equity Index Interest under Insurance Law §4223

Insurance Law §4223(c)(4)(D)(ii) provides that the formula for crediting of equity index interest on fixed equity index annuities can include “factors, such as participation rates, margins, caps and floors that adjust the percentage change in the equity index...” [emphasis added]  

Equity Index Interest under Insurance Regulation 47

Section 50.2-9(d)(2)(i) of Regulation 47 states, in part, that the formula for the crediting of equity index interest on non-guaranteed index annuities must meet “the requirements of Insurance Law section 4223(c)(4)(D), except as otherwise provided in paragraph (4) of this subdivision with respect to the length of index crediting periods.” Hence, the provision for “margins” in Insurance Law §4223 applies to equity interest crediting formulas for annuities providing non-guaranteed index benefits.

“Margins” would typically be a numerical quantity in the index formula. The percentage change in the equity index at the maturity of the crediting period would be reduced by this quantity.  This reduction is equivalent to assessing a percentage reduction in the equity index account. The revenue realized from this charge is typically used to support a higher cap rate than would otherwise be offered. In determining compliance with the table of minimum cap rates in §50-2.9(d)(5), cap rates should be net of these fees.

Any “Contract Charges” assessed, as permitted under Insurance Law §4223(c)(3)(B), would not be considered in the determination of “cap rates net of fees.”

Contact Person

Questions concerning this guidance should be emailed to Richard Bernardi, Supervising Actuary – Life.