July 7, 2008
Comments on File No. S7-14-08
Indexed Annuities and Certain Other Insurance Contracts
Dear SEC and Mr. Cox,
I have decided to take the time to point out several very important reasons, that the most recent proposed regulation involving Fixed Indexed Annuities (hereby labeled FIAs) is a poor decision, and one unfortunately made via media bias, and lack of overall understanding. I hope that my comments are taken with thought, and even that they might create research opportunities for insurance agents, registered reps, and your offices.
FIAs are not currently a registered product, as you know. The products were designed to find alternative ways to credit interest inside of an Insurance Company provided Annuity. They were designed in an effort to utilize listed legislation in the Safe Harbor Rule 151. Whereas the product is not marketed as primarily an investment, and the insurer assumes the overall investment risk. Both of the above requirements are thoroughly met in current FIAs.
Since our goal (as an industry) is to provide an insurance product not an investment, current FIAs provide a minimum guaranteed interest return. This fluctuates from product to product, but has been suggested by the NAIC, and accepted by most states, to meet non-forfeiture conditions of being at least 87.5% of principal at a guaranteed interest rate for the contract, not to be less than the 1% and not greater than 3% based on the Constant Maturity Treasury Rate reported by the Fed. That wordy sentence effectively means, if held till the end of surrender charges, your contract is not only guaranteed to return principal in ALL scenarios, but also to guarantee an interest credit. Many products have features, offering 1.5-3% growth on 100% of the principal, if held to the end of surrender charges a product could provide a 3% compounded interest credit even in a time-frame where there were no positive SP500 linked credits. That sounds like an insurance contract from everything our market has ever been provided.
The FIA industry is clear about our goal in selling. We are trying to beat the rate of return for other principal protected products. We compete with all financial products, BUT the message is overwhelmingly clear, we are just trying to outperform principal protected products. Money may come from a registered product into a FIA, but the sale is not one of outperforming their current investment. The sale is comprised of safety, tax deferral, better yield than bank CDs, access to their money, and estate advantages. We are not trying to outperform the market, even though in some instances an FIA might. My company employs Actuaries to design FIAs, and help keep our advisors and agents selling from a standpoint of education. Long-term scenarios with FIAs show they DO NOT outperform the SP500. We are selling a product promising nothing more than principal protection, and the opportunity for a higher return than other safe money locations.
When this topic is brought up, I cant help but hear from the pro-regulation argument about the confusing products, the bad sales, and the horrible surrender charges. These are all items that are blown out of proportion by the media. Now our industry very likely should have started arguing back with the media from the get-go on these topics. Instead, we idly let them ramble on, even when blatant misinformation was being given out. I would like to clarify a couple of these topics, and I do hope that you can see when the products are examined from a knowledgeable standpoint much of what the media reports is a gross misrepresentation.
Indexed annuities seem very complicated from a first glance, I will not argue this. However, the basics of the contract, and the features that truly affect clients, are not so confusing. A typical annuity sales presentation discusses four things: principal protection, opportunity for better interest gain than other safe money locations, access to your money though restricted, and the financial goals of the client for their safe money. Those four topics are really very basic, and the way an annuity fits into them is equally basic. Earlier in my comments I discussed minimum guarantees, this is very often relayed to the client in a sale. As an agent, you can have confidence in selling your product knowing that by the end of the term of surrender charges, your client will have at least some sort of gain. The most confusing issue with FIAs is interest crediting. Overall we really only show 4-5 different ways to credit interest in this industry, with just a few outlying modifications. Most FIAs show interest credits every year, we lock in gains, and we start crediting for the next year. Using either a cap on gains, a fee off the gain only, or adjusting the participation of the clients money, we determine their interest credit. Most of these crediting options provide the client 4-6% per year on growth. The interest calculations are not as complicated as some would have you believe, and in fact in a ten minute discussion with most any client, I can explain how they will receive their interest credit for the year. The other huge topic in the media is Surrender Charges. These words are really being spun as a negative, when in reality they do nothing more than outline the type of FIA a client should be looking at. If you have a client who only wants to grow their money for three years, you can look at products with that term of charges, if you have a younger client, who wont touch the money for twenty years, then we can look at a longer term product like ten to fifteen years in length. Surrender charges are very clearly disclosed (typically in multiple locations) in required forms by the Insurance carrier. There is no need for a 100 page prospectus, when we can very clearly show in a six inch by two inch rectangle a declining surrender charge schedule. There is no easier way to do this Further the disclosure a client is required to sign, lists out what would cause them to incur a surrender charge. Overall, an annuity is not a complicated product, its an insurance contract, searching to protect the clients money, and creatively credit interest to their asset.
I have clarified my opinion, and current legislations opinions why a FIA is not a security-based product needing SEC regulation. My next point is one that requires even more consideration. By requiring what is currently an insurance contract to adhere to a registered product requirement list, this regulation would be creating unneeded economic hardship for many people in this country. Not only would this ruling affect tens of thousands of insurance agents, but it would affect hundreds of insurance companies that employ thousands of people as well, in turn hurting our end user the suitable client. The need to make sure FIA sales are suitable and fully disclosed is important. I personally have seen our industry increase the disclosure, suitability requirements, and sales monitoring practices by leaps and bounds over the last five years. The states currently monitor annuity sales, and require the individual insurance carrier to monitor them as well. I have seen proposed policies rejected, based on a clients listed needs. The system in place now works, with a very little complaint to total policy issued ratio. Regulating these products as registered investments, would create massive job loss in this country, without a proper cause.
One final very valid point about the potential regulation of FIAs, is the impact of these quality products availability. Im sure the SEC knows better than myself, the number of clients that work with a registered rep. This number is surely quite large, and rightfully so. However, there are tens of thousands of FIA clients that do NOT work with a registered rep, whether it is due to cost, location, or any other reason many FIA clients are actually dealing with an agent they use for other INSURANCE reasons. By disallowing an insurance agent to sell an insurance product and regulating it, a vast portion of our population will no longer have access to these contracts. Couple the access issue together with a general misunderstanding of FIAs by Broker Dealers and you will shorten still the population that has access to these products. I assure you that with a thorough look at FIAs, you will see an insurance contract that NEEDS to be sold by insurance agents.
I think that most quality insurance agents, registered reps, and the SEC can admit there will be a bad apple in any industry. We as a people can not escape the fact that some people will always find a way to bend the rules or go as far as to break them. However, I can personally attest that these bad apples are few and far between. Taking away some of the state control and requiring only registered reps to be able to sell FIAs, is an overreaction to a few bad apples. Most FIA clients are more than happy with their insurance contracts, our complaint ratio is very low, and from personal experience FIAs make a fantastic option for safe money minded clients.
Best regards to all who made it this far into my comments,
Jason Walter, Annuity Marketing Advisor and Independent Agent