On Friday, July 27th,
WSJ: As far as I am aware there are at least a dozen lawsuits around the country asking for class action status that have been brought by people who bought index annuities against the insurance companies who sold them. How does the industry view each of these claims, and how is it responding to them? Does the industry consider them completely without merit, or does it think some/all of the claims are legitimate? Are the claims leading to any changes in the industry, or does the industry think they are unwarranted?
NAFA: Because these are ongoing legal cases, NAFA cannot comment on any specific claim. We’re sure you are aware that a judge in the U.S. District Court in Honolulu ruled that plaintiffs cannot bring a class-action suit against an indexed annuity manufacturer. As you know, a claim or a certified class is not a conclusion it is the beginning of a process of disclosure, discovery and ruling. NAFA is reminded by the strong position theWall Street Journal has taken on the what it calls “the increasing marauding behavior of state attorneys general” and has written of the assault of Mississippi’s Jim Hood on State Farm Insurance (Review & Outlook, March 15, 2007) and just today said that Spitzer’s activity was “a classic example of the Spitzer political method: nasty and exaggerated accusations fed by selective, politically motivated news leaks” (Review & Outlook, July 27, 2007). Whether any or all of the claims to which you refer have merit is the role of and will be determined by our judicial system. NAFA supports all activities that protect individuals from purchasing products that do not help fulfill their financial and retirement objectives and strongly opposes fraudulent, unscrupulous, or misleading sales methods of any kind. However, NAFA also strongly disagrees with any implication that these activities or representations are widespread or endemic. Industry reviews of the documented consumer complaints and resolutions with insurance departments show that the vast majority of sales are not only appropriate for and desired by the customer but are satisfactory aswell. Kelly - I looked up one of my sources and found that the most public information supporting this statement is available from the NAIC. The most recent report available is for 2005 and the total number of closed consumer complaints for indexed annuities was 1 complaint for every $260 million in premium. Considering the average indexed annuity policy is about $50,000 that is less than .002% of all policies. More importantly about 99% of all policyholders were satisfied. (Sources: www.naic.org/cis/index.do and Advantage Compendium).
WSJ: My understanding is that the allegations fall into two camps: either that the products were unsuitable for the older people to whom they were sold:
NAFA:Declared rate and indexed fixed annuities are responsible for protecting billions of dollars worth of retirement assets and have saved many a contract owner from losses in riskier vehicles. They provide tax deferred growth, solid return potential, minimum guarantees and eventually something no other financial product can provide, an income you can’t outlive. These benefits fulfill the conservative promises of safety and minimum guarantees for which many people are looking. NAFA supports activities that ensure all individuals enjoy a competitive and safe sales environment so that they may make the right decisions to secure their financial future - especially individuals approaching retirement or currently retired who much protect their assets as they do not have time to recover losses nor do they have employment through which to earn these dollars again. Making a blanket statement that all annuities are inappropriate is wrong. It can be likened to concluding that a particular car, home, stock, or a multitude of other items is wrong for all individuals of any type of group. Those conclusions are based on a simplistic one-size-fits-all or this- size-fits-no-one. Thus, NAFA believes that only choice provides individuals with the financial freedom and opportunity to meet their desired goals and restricting that choice through legislation or regulation takes away financial freedom and opportunity.
WSJ: or that there were inadequate disclosures about the mechanics of the bonuses.
In an effort to make sure that the client has understood what has been sold to them, companies require disclosure statements that detail the specific component of the product. However this is just one of the many tools the industry uses to ensure all individuals do enjoy a competitive and safe sales environment. An insurance policy (of any type) is a unilateral contract—which means it is drafted in whole by one party and accepted or rejected by the other in total. There is no negotiation involved. When called into question these types of contracts are typically construed by the courts against the drafting company. Thus, there is nothing to be gained by the carrier using confusing or ambiguous language. Advertising materials are also covered by state regulations. If a product is mentioned by name, surrender charges must be included in the advertisement. Details of surrender charges, interest crediting methods and bonuses are included on a summary page prominently positioned at the front of the contract. In every sale there are at least three opportunities for the client to obtain information: sales material, disclosure form and issued policy. And if all else fails, the client always has a free look period in which to change his mind.
WSJ: I have seen/read about NAFA's white paper making the case that indexed annuities are insurance products, not securities. I'm assuming – but want to double check - that NAFA still holds fast on that position? Why/why not?
NAFA: NAFA still holds fast that fixed declared rate and indexed annuities are NOT investments as defined by securities legislation and regulation or the SEC. Fixed annuities are insurance contracts that provideguaranteed protection of principal and guaranteed payout options. They promise an interest rate crediting strategy that is calculated based on an objective index rather than an interest rate declared by the company. As with all fixed annuities, indexed annuities are highly regulated under state insurance laws. The value to a purchaser is a potentially higher interest rate by allowing more variation in rate based on the indices, but with the minimum guarantees of value that are required of all fixed annuities. Fixed indexed annuities are not a “cousin,” “hybrid” or “like version” of variable annuities. Indexed annuities are NOT linked to stocks and the insurance company carries the risk in their general account – a key test to insurance status. Interest earned in an indexed annuity is clearly based on the increase of a particular index, most commonly the S&P 500. Conversely, variable annuities, like any other security, pass through to policyholders the full equity performance (up or down) via a unit-linked calculation out of each sub account of the separate account.
WSJ: Are there any other regulatory actions that insurance companies are taking/have taken on their own to stem the complaints? New/beefed up agent training, etc.?
1. NAFA has formed a Market Conduct/Best Practices Committee whose members include executives from major fixed annuity carriers and marketing organizations. The committee is in the process of developing Market Conduct Guidelines and Best Practices Standards.
2. The Insurance Marketplace Standard Association (IMSA) has produced Suitability Standards that all insurers must demonstrate they enforce to be awarded IMSA membership.
3. NASD and Insurance Regulators have released a joint statement supporting the adoption of a new rule to require that insurance companies and agencies recommend only suitable annuity products to their customers. All four are members of the Annuity Working Group, which was established by the Minnesota Department of Commerce and NASD last year to evaluate regulatory standards for annuities in a number of areas, including suitability.
4. In discussions and coordination with Jim Mumford, Deputy Commissioner of Iowa Insurance Department, NAFA will develop a 4-hour education course for insurance agents on Fixed Indexed Products. The course curriculum will include the different types of annuities, the annuity contract provisions, insurance elements and interest crediting methods, the advantages and disadvantages for individuals under 65 and again for those over 65, and suitability and marketing standards and best practices. When individuals are tricked, pressured or fraudulently convinced to buy any financial product, obviously it is not good for them or their interests, but it is also harmful to the millions of legitimate sales personnel, the many companies offering quality products, and the entire financial services industry. NAFA is in full support of the Iowa Insurance Department’s FIP training requirement which all agents must fulfill by January 1, 2008 before they can sell any Fixed Indexed Products.
5. NAFA is working with the ACLI, NAVA, NAILBA, IMSA, LIMRA and NAIFA directly to advance public policy on retirement income security issues. As the only association dedicated exclusively to fixed annuities, we understand the product, the market, and the distribution of these unique products, NAFA believes in the importance of superior training of and complete understanding by its sales personnel.
Thank you for seeking out NAFA and providing it with an opportunity to comment. We appreciate your efforts.NAFA * 2300 E. Kensington Blvd * Milwaukee, WI 53211 * 888-884-NAFA