NY Issues Circular Letter on Excess Withdrawals and GMWBs

The NY Insurance Department today issued Circular Letter 5 (2011) establishing disclosure rules for excess withdrawals under GMWB riders. The regulatory concern expressed is that using the proportional methodology that many companies use for determining the impact on guaranteed benefits of an excess withdrawal could mean that “the reduction in the guaranteed withdrawal amount may be disproportionate compared to the excess withdrawal amount.” The Circular Letter includes an example where the Department concludes that a one-time $80 excess withdrawal results in a loss of $100 payments for life.

At one time, it is likely that this potential for an adverse and inadvertent economic consequence to the contract owner would have resulted in a “desk drawer” prohibition of the methodology, even in the face of insurers’ acknowledged need to limit anti-selection exposure. More recently, however, a typical approach is to require disclosure and, in fact, that is the mandate of this Circular Letter.

Two disclosures are required: The first in the annual (or other periodic) statement sent to the contract owner, and the second at the time of a request for an excess withdrawal. After considering a requirement that the disclosure be individual-specific, the Circular Letter permits a general disclosure so long as a personalized calculation is available that explains the specifics of the proposed transaction. The Circular Letter provides sample disclosure language that the Department indicates it finds acceptable.

The Circular Letter gives insurers 90 days from today to implement the disclosure.