With long-term financial products like annuities, it is important that your annuity provider remains a going concern. However, this is not always the reality. Annuity providers can fail- despite the best efforts of regulators and fund managers. Although annuities provide guarantees, failure of annuity providers can be attributed to other parts of their business model.
Annuity providers can recover from insolvency in certain circumstances. However, you need to know what will happen to your precious funds in such an event. You may have known about the guarantees associated with the annuity. However, you may also have thought that it was unlikely that your provider will go bankrupt. Thankfully, several positive actions occur if your annuity provider becomes bankrupt.
a) Intervention by regulators
b) Use of reserve funds to honour obligations
c) Refund of contributions
d) Transfer of policies to another annuity provider
The first step taken is intervention by the annuity regulators. In the case of fixed annuities, insurance regulators will do that job. With variable annuity funds, the relevant insurance body and the Securities and Exchange Commission jointly undertake that responsibility. The regulators have several options. They can manage, restructure, rehabilitate or wind-up the annuity provider- depending on the circumstances. Ultimately, the primary goal of the regulator is to prevent the annuity provider from failing.
An annuity is a liability for an annuity provider. As part of the regulatory framework, annuity providers are required to allocate liquid assets to meet annuity liabilities. The regulators can use proceeds of the fund to meet liabilities to policyholders, to which they give priority. Annuitants may either be contributing or receiving payouts. In the unlikely case that assets were not committed to service the annuity liabilities, regulators take action against the offenders after a proper audit. As a safety net or last resort, state guaranty funds can be used.
Where the annuity provider is being wound up, annuitants who were still in the contribution phase may be offered refunds of their contribution/ cash value. It depends on whether the annuity provider followed the regulations in dedicating liquid assets to meet annuitant’s liabilities. In the event of wrongdoing, annuitant’s claims may only be disbursed once legal matters are resolved.
Regulators may also choose to auction existing annuities to other viable annuity providers. Policyholders have the opportunity to continue their annuity with another provider. Different terms and conditions may be negotiated (for e.g. payout rates). All of those details would be covered in the bidding process.
Annuities offer guarantees on contributions and cash values to annuitants. An annuity provider’s insolvency tests the strength of that guarantee. The guarantee is only as good as the annuity provider who makes it. A reputable annuity provider with a good rating would be able to back its guarantee. Where regulators are active, annuity providers are not permitted to do what they wish with your funds either. Therefore, if your annuity provider goes bankrupt, it is highly unlikely that your funds will be flushed down that company’s toilet.