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  • August 2006
  • Why Indexed Annuity Consumers Should Start Thanking the NASD

    August 31, 2006 by Sheryl J. Moore

    I had a comrade toward the beginning of my insurance career who seemed to be one of those true, reliable friends. She was someone whom I bonded with immediately, seemed to share many common interests with, and always held my confidences – what every woman looks for in a best friend. Then, I learned what all of the buildups had truly been about – she wanted to know if I would set her up with my good friend- the actuary in my department.

    Sometimes the most welcoming advances are not always what they seem.

    In the same spirit, Indexed Annuity consumers would be well-advised to look through the smoke in the consumer-friendly adjustments made to the contractual provisions of Indexed Annuities (IAs) recently. In my opinion, carriers are not enhancing their products simply out of the kindness of their hearts. Instead, Indexed Annuity consumers should start thanking the NASD.

    Let’s give a little background: IAs are fixed insurance products, and therefore regulated by state insurance laws. Only two carriers have IAs that are registered with the Securities and Exchange Commission (SEC), and therefore regulated as securities products (as are variable annuities). The National Association of Securities Dealers (NASD) is a self-regulatory organization and has no regulatory authority over the status of IAs. They are most noteworthy in the world of Indexed Annuities for issuing the “Notice to Members 05-50” in August of 2005. This notice changed the industry as we know it, as it suggested that all broker/dealers, treat the product as if it is a security, regardless of the product’s insurance status.

    That being said, what did the NTM 05-50 mean to the world of Indexed Annuities? Since the notice was issued, many securities producers have been forced to sell from their B/Ds “approved lists” of Indexed Annuity products. Just what kinds of products make it onto these “approved lists?” Our consulting firm assists many B/Ds with identifying which of the 295 available Indexed Annuity products meet the criteria for their lists. Generally, there are a few items that are standard for all Broker Dealers: carrier must be rated “A,” or higher with A.M. Best, product must have ten year surrender charge period or less, provide the full Account Value upon death, and allow 10% penalty-free withdrawals annually. Some “approved lists” are more stringent, not allowing products with premium bonuses, or compensation higher than 7.00%. Some B/Ds have even adopted guidelines based on desk-drawer regulation from state insurance departments called the “10/10 Rule.” Many believed that when NTM 05-50 was released, producers who were not securities licensed would continue doing “business as usual,” and not be impacted by the notice. However, the products that are available to these agents have transformed dramatically since one year ago, and they are most definitely having to adjust to new product. The landscape now has lower surrender charges, less high-premium bonus products, and compensation is down. Consumers, on the other hand, could be thanking the NASD for some consumer-friendly changes.

    Death Benefits

    For example, at the close of 2005, two top carriers refiled their IAs to pay the full Account Value upon death at all ages (some products in the carriers’ lineups previously had required a minimum 5-year annuitization to receive the full Account Value, for older issue ages). Another carrier recently made a similar enhancement on two of their most popular Indexed Annuities. This carrier’s enhancement gives clients the option of selecting an alternative death benefit option that pays the full Account Value in a lump sum. However, those opting for the original death benefit option will be given the incentive of an additional 1% premium bonus. Perhaps the most sweeping death benefit enhancement was that announced by a third carrier in early August. The company previously required a minimum 5-year annuitization (at all ages) to receive the full Account Value upon death for all of their IAs. Effective 8/1/06, the carrier announced that all single-tier products will pay the full Account Value upon death in a lump sum (two-tier products will continue to offer their original death benefit options).

    Surrender Charges

    The other large transformation that has occurred in product development bears influence from a state regulation standpoint, as well as from the NASD’s NTM 05-50. For a little over a year, several states have been identified that have adopted the “10/10 Rule”, which dictates that the state will not approve any annuity policy forms that exceed a 10-year surrender charge, nor a 10% scale. Today, approximately 20% of the states have adopted this informal regulation. Broker Dealers’ compliance areas are struggling to create rules for what is/is not suitable in terms of Indexed Annuity products on “approved lists,” and many have determined that the “10/10 Rule” is a good guideline. In turn, insurance carriers have had to make modifications to their annuity designs in order to comply with these requirements. Most IA carriers have at least one product that is compliant with the “10/10 Rule” in their lineup. Although, several companies have adopted a philosophy where all ongoing product development will be “10/10 friendly.” Recent product launches from companies such as American Investors Life, AmerUs Life, and Equitrust show the carriers’ dedication to ongoing 10/10 product development and other carriers are making modifications to existing products to make them “10/10 friendly” as well.

    Commissions

    Indirectly, these surrender charge modifications result in lower commissions paid to the agent. After all, it is awfully difficult to price 10% compensation into a 10-year product. The average street-level compensation on all IAs dropped from 7.43% in the 1st quarter, 2006 to 7.05% in the 2nd quarter. This is the direct result of 10/10 product development from the carriers. Despite a recent surge of commission bonus programs, it should be noted that during the year one carrier voluntarily dropped their compensation by 1% just to assist in getting onto B/Ds “approved lists.”

    From a carrier’s perspective, getting onto a B/D’s “approved list” is paramount. How important? The #1 seller of Indexed Annuities, Allianz Life, saw sales slip nearly 30% from the 1st quarter, 2006. President Doug Reynolds sited new regulations from the NASD as one of the reasons the company’s sales have “flattened” in recent months.

    American Equity Investment Life saw a dramatic shift in its market position, falling from #3 in sales in the 1st quarter to #6 just one quarter later. The formerly “B++” rated company had difficulty breaking through to any B/Ds “approved list” because of the rating and blames the drop in sales on the NASD. The carrier was upgraded to “A-” by A.M. Best in early August and will undoubtedly not have any difficulties making it onto B/Ds lists in light of their new rating. As we can see, getting onto an “approved list” is like achieving rock star status. That being said, evidence suggests that insurance carriers may be making these contractual modifications to their Indexed Annuity products to “make the list,” not necessarily to make the client happy.

     

     

     

    Sheryl Moore is President and CEO of WinkIntel.com, an annuity and life product resource in Des Moines. She has nearly a decade of experience working with annuity products and is formerly head of competitive intelligence for two key life and health insurers. She may be reached at sjm@intelrockstar.com

    Categories: Sheryl's Articles
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