November 14, 2006
To: Kerry Pechter Annuity Market News
From: Kim O’Brien, Executive Director
Re: NASD Guidance on EIAs November 2006
Thank you for highlighting speakers at NAFA’s 3rd Annual Producers’ Expo & Forum to your readers. NAFA is always grateful for exposure given to fixed annuities and appreciates that Annuity Market News attended the conference. Unfortunately the snapshots of information you provided reflects only a portion of what a speaker presented and the abbreviated context leaves the reader with no choice but to concur with your premise that “the middleman position between carriers and producers is up for grabs” and that 05-50 is viewed by the fixed annuity industry as “ net positive.” In an effort to give your readers the full picture, we would like to share some facts and a more expanded view from those same speakers as well as other attendees of the conference.
“NASD Guidance…Seen as a Net Positive” NAFA does not believe that the release of 05-50 is in any way positive. NAFA believes that NASD raised undue concern and created unprecedented market confusion over the securities law status of indexed annuities in their 05-50 Notice to Members (NTM). NAFA has also publicly stated its concern that NASD has chosen to issue a NTM instead of taking the authoritative and principled route of filing a Rule Proposal which allows for public comment and response from the SEC, the NASD has chosen to issue an NTM. The NTM does not improve clarity for constituents and creates confusion for insurance companies, broker-dealers, registered representatives, and consumers. Furthermore, NAFA contends that the NTM creates an anti-competitive climate because, in the absence of guidance from the SEC, NASD members may fear disciplinary action for all past and future sales of a perfectly viable, suitable and appropriate insurance product.
“05- 50 has roiled the indexed annuity industry”You state correctly that Allianz reported sales down by 36% from the prior quarter. However, you did not report that of the 27 companies reporting indexed annuity sales to LIMRA, 16 of them (60%) reported increased sales over the prior quarter. Also interesting is that the following companies all reported double digit gains in indexed annuity sales over the prior quarter. Lincoln Financial (32%), Aviva Life (31%), Jackson National Life (27%), Old Mutual Financial Network (26%), AmerUs Group (21%), North American Company for Life and Health (21%), ING (21%), National Life Group (15%), Midland National (13%), According to Chad Tope, Senior Vice President with ING, the increase in sales during this time period reflects the fact that many producers are beginning to demand consistent products that are in the best interest of the ultimate purchaser. Rather than competing against other products, producers are finding index products as a compliment to their existing product stable to meet their clients changing need.
Of the remaining 8 companies reporting negative sales numbers, half of them had just entered the indexed annuity marketplace late in 2005 or early 2006 and have not been in the marketplace long enough to accurately portray sales rationale.
“The Middleman position between carriers and producers is up for grabs, with the strength and compensations shifting to BDs from IMOs”Wholesaling is either company owned or it’s not. “Middleman” is a metaphor that conjures the image of the unnecessary involvement of one individual. If we could just get rid of that pesky “Middleman” we’d all be better off, right? Does a defendant really need a lawyer? Couldn’t they just talk to the judge? Why is there such thing as a middleman in any industry? The answer is that wholesalers are facilitators and educators. Carriers have always had a choice as to how they distribute products, either directly or through intermediaries. This is nothing new. Every function in the process has always been up for grabs. This didn’t change with 05-50. It’s a simple question of the economics of distribution. In reality, hundreds of people contribute to the delivery of every financial product. They may be lawyers, actuaries, educators, writers, artists, administrators, salespeople or wholesalers. If companies choose to go direct, they may do so with company owned employees, but it does not follow that this approach is less expensive. On the contrary, some firms have found the wholesaling function less expensive to outsource. Independents can often do the job more efficiently and with greater passion than a large corporate bureaucracy. Likewise, some BDs appreciate assistance from independent wholesalers who are not chained to a limited set of product recommendations. Most companies in the independent BD market are comfortable with, and committed to, independent wholesaling for these reasons. An insurance carrier might be forced to go direct if it finds independent marketing organizations unwilling to support its products. As far as regulation is concerned, its cost in a free market system will eventually be absorbed by the consumer, regardless of how the product is distributed. Just as the cost of environmental controls work their way into the price of manufactured products, regulation is reflected in the potential economic benefit of financial products to the consumer. This is not a bad thing, as long as you believe the consumer receives valuable protections as a result.
“If they kept this product simple you would find it in every American Household”NAFA contends that most indexed annuities interest crediting calculations can be accomplished by a 6th grader. Many are as simple as the annual point-to-point with cap. For example: 1. Take a beginning S&P 500 index value of 1210 .08 (March 2nd, 2005) and ending index value one year later of 1291.24; the increase is 6.7%. 2. If the pre-declared cap for the year is 10%, the interest credit is 6.7%.
If the increase percentage had been greater than 10%, the interest credit would have been “capped out” at 10%. In most contracts, next year’s interest is calculated the same way with a new starting and ending index values and is credited to last year’s ending balance.
If you consider the following statistics:
• Almost 98% of all closed NAIC complaints in 2004 (latest figure available) were against variable and declarerate, deferred annuities with index annuity complaints covering the remaining 2% (Source: The Advantage Compendium)
• Variable annuities (and their many choices of funds, riders, fees, etc.) out-sell fixed indexed annuities by more than 2 to 1 (Source: LIMRA)
• Over 87% (Source: USA Today) of American households owning (and, more incredibly, programming a VCR or DVD recorder) it appears that most Americans (even those older than 6) do or could understand this product.
“There is a movement of people dropping their relationships with broker/dealersAs reported by Jack Marrion last spring at the Annual NAIC conference, less than 1% of index annuity producers have reported dropping their registration to sell index annuities. There are few statisticians who would consider less than 1% a “movement?”
…”because they can never be reviewed”Maynard’s contention ignores the facts that to sell fixed annuities you must hold an insurance license (subject to annual renewal) in each and every state where your client buys it. Fixed annuities are heavily regulated and enforced by all fifty states statutory reserve guidelines, minimum non-forfeiture laws, insurance company investment laws, GAAP reporting standards, and Actuarial Guideline 35. The marketing and sales of fixed annuities are also highly regulated by state insurance laws, including comprehensive insurance trade practices provisions covering misleading presentations, false advertising, full disclosure, etc. Each state requires that every licensed agent complete continuing education to ensure that they have the latest knowledge of laws, products and insurance practices. Most importantly, insurers are voluntarily requiring their agents and brokers in all states, to follow suitability standards and disclosure rules. NAFA is working with the Iowa State Insurance Department on continuing education requirements specifically designed to ensure indexed annuity product knowledge and marketing principles. NAFA believes that the market for fixed indexed annuities will continue to expand and there will be room for all distribution channels to participate in the expansion. NAFA also believes that the outlook for the continued popularity of indexed annuities and the independent agents and marketing organizations who sell them is extremely positive because 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 those in or near retirement are often looking. Insurance agents and marketing organizations are the most knowledgeable about these benefits and will continue to offer value to the customer.
NAFA * 2300 E. Kensington Blvd * Milwaukee, WI 53211 * 888-884-NAFA
NAFA is the National Association for Fixed Annuities. NAFA was created to foster a better understanding of all fixed annuities, regardless of interest creditin strategies. It is the only independent, non-profit organization dedicated solely to the promotion and preservation of these unique products. Permission to distribute and/or reproduce this document for NAFA members may be given upon request. Any unauthorized distribution is strictly prohibited.