MetLife Retirement & Income Solutions

Benefits of Separate Account Insulation for Stable Value

Jun 30, 2023

During times of economic uncertainty and high inflation—and against the backdrop of recent bank failures—it makes sense for people to reevaluate the safety and stability of their investments. One option to explore for stable value, including collective investment trusts (CITs), is a separate account guaranteed interest contract (GIC).  A separate account GIC provides an alternative to traditional general account products. A separate account contract preserves the key features of general account stable value contracts*– guarantee of principal and interest for retirement plan participants  – but adds investment flexibility, control, transparency, and security, all in one comprehensive package.

MetLife’s CIT solutions are fully invested in Metropolitan Life Insurance Company (MLIC) Separate Account contracts and, therefore, guaranteed by MLIC.*  MetLife’s Separate Account GICs are not held in MetLife’s general account but, instead, are invested in separate accounts, sub-advised by a variety of best-in-class asset managers. This insulates those assets from the claims of  contract holders invested in MetLife’s general account, or in other separate accounts. It has the added advantage of providing transparency into the underlying investment portfolio.

The driving force behind the development of separate accounts was a desire among insurance company contract holders for greater investment flexibility than the general account could typically provide. In the 1950s, pension plans began to explore using stocks to fund their liabilities. Since U.S. insurers generally were limited in the degree to which they could invest in equities, they were at a severe competitive disadvantage compared to managers of assets held in trusts, who were free to invest in equities.

The first separate accounts appeared in the early 1960s. As the concept was implemented and refined, the uses of separate accounts grew to include not only equities, but also fixed income, real estate and international securities. Further developments saw separate accounts used as the foundation of guaranteed products such as GIC alternatives (stable value alternatives),  variable life insurance and annuities sold to individuals.1

Who owns the assets in a separate account?

While under insurance law the insurer owns the assets of a separate account, the  contract holders under a separate account contract have “first claim” on the assets of the separate account. “First claim” means that the assets in the account must legally be used to pay benefits due to the separate account contract holders before they can be used for anything else.

Is there a standardized legal basis for separate account insulation?

Insurance companies are subject to regulation at the state level. The National Association of Insurance Commissioners (NAIC) develops model laws and regulations intended to promote uniformity in legislation and interpretation among the states. Model Variable Contract Law2 authorizes the legal insulation of separate account assets from general account assets. The NAIC encourages the adoption of model law by the states.

While requiring that assets in a separate account “shall be owned by the insurer,” Section 4240(a)(12) of the New York State Insurance Law specifically states that, when the contract liabilities are equal to the assets in the separate account, they are not “chargeable with liabilities arising out of any other business of the insurer.”3 This is reinforced by Section 7435(b), which governs how the claims under a separate account contract are handled in the case of insurer insolvency.

The General Counsel of the New York Insurance Department released a 1991 opinion confirming the concept of separate account insulation in the case of insurer insolvency,4 and this position was affirmed in 1997.5

In the unlikely event that  MLIC became insolvent, the insolvency provisions of the New York State Insurance Law would apply instead of federal bankruptcy laws, no matter where the MLIC contract was issued. In the case of an employee benefit plan, under the New York law the market value of the assets in the separate account backing the contract’s benefits would be available (as noted above) for the benefit of the plan’s participants. MLIC designs, files and maintains the separate accounts and the contracts that the separate accounts support so that the claims of separate account contract holders will take precedence over those of other contract holders and over those of general creditors of MLIC.

How are separate accounts monitored by regulators?

In addition to reporting to contract holders, insurers are required to report separate account assets in their annual and quarterly statutory statements to state regulators. Most states also require the insurer to file an additional statement devoted exclusively to separate accounts. For guaranteed products such as GIC alternatives (stable value alternatives) or guaranteed group annuities, state insurance regulators have requirements to ensure adequate reserves.

With respect to MLIC’s Separate Account GIC, the contract holder has a guarantee from MLIC to pay the benefits specified by the contract while the contract is in effect. *Even if the separate account’s assets are not sufficient to meet these payments, MLIC remains obligated to provide these benefits in full. The separate account structure does not diminish MLIC’s obligation to fund the benefits specified in the contract.

The significant benefits provided through a separate account contract, including asset insulation, investment flexibility, control, transparency and security, make it an option well worth consideration when exploring a stable value solution.

This information is for general informational purposes only and does not purport to be complete or cover every situation. Metropolitan Life Insurance Company, its agents and representatives may not give legal, tax or accounting advice and this document should not be construed as such. You should confer with your qualified legal, tax and accounting advisors as appropriate.

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