Indexed Annuities Still Living in the Crosshairs

As the dust begins to clear from the Great Recession, it seems that the annuity business has taken on some new issues and patterns. It’s still the annuity business, but it’s different. Take sales, for example. In the past three years, sales of variable annuities (VAs) and traditional fixed annuities (FAs) sagged under the weight of the recession. That’s a shift from several past recessions, which saw FA sales rise when VA sales fell. 

Far more startling is the fact that sales of indexed annuities (IAs) kept hitting new records all the way through.

It’s a surprise because these products had met with stiff opposition from the securities side of the financial industry, which worked hard to bury IAs if they could not have them declared a security. The IA-bashing was so extreme in the months before enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) that a good many observers concluded the products didn’t have a prayer of surviving as insurance products.

 That is not what happened, of course. Dodd-Frank passed with an amendment that made it crystal clear that IAs are not securities if they meet certain conditions. So IA sales just kept on chugging along as they had been doing. 

As of this writing, industry sources are projecting that IA sales for all of 2010 will total around $30 billion. Now, $30 billion is a far cry from the well over $100 billion in sales that VAs will likely produce for 2010. But the fact that IA sales did not swoon nor evaporate, and that they moved on up even as their traditional FA counterparts sank, is not insignificant.

It suggests that IAs have, indeed, developed market appeal during recessions, as their advocates have been saying for several years. It also suggests the products have taken on their own unique role in the annuity industry infrastructure. It’s like they “belong” now. 

That is, when the stock market is down, these products have curb appeal for safety-minded buyers who want a little upside along with their downside guarantee. The fact that interest rates were also down in this recession gave IAs an extra boost, due to their potential for slightly higher interest than traditional fixed products. 

This is not the first time this pattern of rising sales during recession has shown up. In the recession of the early 2000s, IA sales rose in 2002 and again in 2003 from their year-earlier periods, by several billion each time.   

Changed Thinking 

The annuity market has changed in other ways, too. These are not as easy to see as sales results, as they entail changes in thinking under way now. Following are four examples.  

Source of Funds: Securities interests have long complained that insurance licensed advisors should not discuss taking money from client funds if the source of those funds is a security—unless the advisor is also securities-licensed. Arkansas tried to address that in 2009 by issuing Bulletin No. 14-2009, which essentially prohibits insurance agents from making such recommendations unless licensed by Arkansas to offer investment advice. This has upset some insurance and annuity advisors, because the bulletin says nothing about insurance product recommendations made by securities reps who are not insurance licensed. That becomes a sore point if a securities rep recommends that a customer withdraw funds from, say, a fixed annuity to invest in a security. But thinking may be changing with this issue. Two states—Iowa and Minnesota— are co-developing source-of-funds guidelines for both agents and reps. The guidelines “will let sellers know when they are crossing the line in making a recommendation that money be taken from a securities product and put into an insurance product or from an insurance product, and into a securities product,” says Jim Mumford, first deputy commissioner and securities administrator in the Iowa Insurance Division. Such a cross-discipline approach is definitely new, especially in the annuity sector, where VA and IA professionals have been knocking heads with securities folks for years.  

Mandates: The notion that mandates have something to do with annuities is a novel one. But that is what emerged in a public discussion last year about “inplan annuities” and other lifetime income options for 401(k) plans. The Employee Benefit Security Administration (EBSA) had invited comments on various lifetime income questions through its website. A stream of comments came in, including many from citizens and some large employers who objected to the idea of the government mandating lifetime income in 401(k) plans. As one commenter put it: “Are you really considering implementing a regulatory requirement for annuitization of existing 401(k)s and IRAs? … Our response is an overwhelming NO. We are outraged that you would even consider restricting our freedom to choose how we invest our retirement funds.” Another wrote: “Any thought of mandating that people buy government bonds or annuities would be an unconstitutional infringement on their rights, freedom and property.” It is difficult to tell how pervasive this concern has become. However, it would be a good idea for annuity advisors—as well as 401(k) brokers and administrators— to get ready to discuss the idea of annuity mandates of any kind with clients should the topic come up. At this time, there is no such mandate. But worry that mandates could happen may be an underlying concern. One much. “First,” the objector complained, “it will be [offered as] a ‘choice’ or an ‘option.’ Later, it will be mandatory.”

Standard of Care: Strengthening the standards of care as they relate to annuity sales has been an ongoing issue for state regulators. This spurred the National Association of Insurance Commissioners to adopt the new Suitability in Annuity Transactions Model Regulation 2010. This model sets rigorous suitability standards for annuity sales. A few states have already adopted it and more say they soon will. But that has not ended the thinking or the discussion about the standard of care that advisors should use. In January, the Securities and Exchange Commission published a staff study calling for adoption of a uniform fiduciary standard of care for brokerdealers (B/Ds) and investment advisors. Variable insurance agents would be directly affected if the standard goes through, but not fixed insurance agents. Still, industry people are now wondering if—and how—the standard would spread to the fixed side. There is plenty of thinking and discussing going on about this right now.

 Wall Street in the IA Business: At least a couple of big Wall Street securities firms are preparing to enter the IA market this year, according to Jack Marrion, president of Advantage Compendium. He is co-developing the products with insurance partners. This definitely reflects a change in thinking at the highest levels. Big securities firms have ignored the IA market ever since the products debuted in 1995. They also did not participate in the nonstop efforts of B/Ds and allied groups to have IAs declared securities. But now these giant firms want a piece of the action? The very idea of such firms entering the IA market says a lot about what they probably think of the products and where the market might be going.

Linda Koco, MBA published in the March 2011 of Insurancenewsnet Magazine


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