DFS charges copany was ‘less proactive’ about investment options
from Moody’s Credit Outlook
Last week, New York Governor Andrew Cuomo announced that AXA Equitable Life Insurance Company (financial strength Aa3 negative) will pay a $20 million fine to the state Department of Financial Services (DFS) for insurance law violations related to certain variable annuity (VA) products. The announcement is credit negative for AXA and the industry because the DFS fine is a reputational hit to the variable annuity insurance product.
DFS alleged that AXA was less proactive than it should have been in disclosing changes to the investment options in VA products that aimed to lower investment return volatility, but also risked lowering policyholder investment returns. New York regulators asserted that because AXA had not been aggressive in disclosing these changes to DFS, the agency was limited in its ability to inform policyholders of their options.
The $20 million fine, although not material to AXA, is one of the largest assessed by the DFS against an insurance company. Although it seems that AXA was within its contractual rights to limit policyholders’ investment choices to reduce its exposure to earnings and capital volatility inherent in VA products under adverse economic scenarios, the DFS believed that the company should have disclosed more information given the sensitive nature and importance of VAs in consumers’ retirement savings strategies.
Variable annuities facing challenges
The DFS fine is a reputational blow on top of the long list of challenges facing variable annuity insurance. These policies pose significant and complex financial risks under adverse economic scenarios. Moreover, there are regulatory risks related to some insurers’ propensity to utilize offshore captives to hold their variable annuity risks, which limits transparency. There is also policyholder behavior risk highlighted by recent experience showing that companies tended to retain customers that cost them the most and lose those that cost them the least.
A parallel can be drawn to long-term care (LTC) products, which have recorded a higher incidence of claims, lower investment returns and many fewer lapses than what insurers priced for. However, we do not think companies have free rein to raise rates, despite being contractually able to raise prices on inforce business as long as it is actuarially justified. Because LTC’s primary clientele, senior citizens on fixed incomes, is a highly sensitive constituency, regulators may feel pressure to reject or limit rate requests.