Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Consumer Protection and Commerce, to which was referred H.B. No. 2139 entitled:

begs leave to report as follows:

The purpose of this bill is to ensure that Hawaii consumers continue to have access to short-term retirement annuities, which are a safe, secure and tax-advantaged investment, in an era of low interest rates and stock market volatility. It does so by establishing a minimum nonforfeiture interest rate for these annuities by enacting provisions of the latest version of the Model Standard Nonforfeiture Law for Individual Deferred Annuities, which was adopted by the National Association of Insurance Commissioners last year.

Testimony in support of this measure was submitted by the American Council of Life Insurers and the Association of Insurance and Financial Advisors. The Insurance Division of the Department of Commerce and Consumer Affairs supported the intent of this bill.

Your Committee finds that Act 210, Session Laws of Hawaii 2002, temporarily reduced the minimum nonforfeiture interest rate for individual fixed annuity contracts from three percent to one and one-half percent pending the development of a long-term solution to the problem of determining an appropriate minimum nonforfeiture interest rate during a period of low interest rates.

This bill is the long-term solution. It balances the insurance companies' need for relief and the consumers' need for an appropriate minimum rate guarantee. It does so by setting an indexed minimum nonforfeiture interest rate by reference to the Federal Reserve reported Five-Year Constant Maturity Treasury Rate (currently 3.12%).

The indexed minimum nonforfeiture interest rate is 125 basis points below this benchmark, and may be set up to an additional 100 basis points lower for annuity contracts that provide for substantive participation in an equity indexed benefit. In addition, the bill establishes a cap on the interest rate of three percent, and a minimum of one percent.

Your Committee finds that under the effective date provisions of this bill, insurers will have the option of using the one and one-half percent interest rate or the new indexed rate beginning July 1, 2004. As of July 1, 2006, the one and one-half percent interest rate will be repealed and all annuity contracts issued will be subject to the new indexed rate.

Your Committee has made technical amendments to the effective date provisions, for purposes of clarity.

As affirmed by the record of votes of the members of your Committee on Consumer Protection and Commerce that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 2139, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 2139, H.D. 1, and be placed on the calendar for Third Reading.