Response: Consumer Advocates Critical of Annuity Proposal
June 24, 2010 by Sheryl J. Moore
ORIGINAL ARTICLE CAN BE FOUND AT: Consumer Advocates Critical of Annuity Proposal
I am an independent market research analyst who specializes exclusively in the indexed annuity (IA) and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I used to provide similar services for fixed and variable products, but I believe so strongly in the value proposition of indexed products that I started my own company focusing on IAs exclusively. I do not endorse any company or financial product, and millions look to us for accurate, unbiased information on the insurance market. In fact, we are the firm that regulators look to, and work with, when needing assistance with these products.
I am contacting you, as the author of an article that was published in the New York Times, “Consumer Advocates Critical of Annuity Proposal.” This article had numerous inaccurate and misleading statements about indexed annuities in it. I am contacting you in response to these inaccuracies, to ensure that you and your readers have accurate, unbiased information on these products in the future.
First, indexed annuities have not been referred to as “equity indexed annuities” since the late 1990’s. The insurance industry has been careful to enforce a standard of referring to the products as merely “indexed annuities” or “fixed indexed annuities,” so as not to confuse consumers. This industry wants to make a clear distinction between these fixed insurance products and equity investments. It is the safety and guarantees of these products which appeal to consumers, particularly during times of market downturns and volatility. Your help in avoiding any such confusion is so greatly appreciated.
Second, the “deceptive marketing tactics” that you reference as being “well documented” in the indexed annuity market are an illusion. The Securities and Exchange Commission (SEC) is not a credible source of information on indexed annuities. The SEC is responsible for the regulation of investment products. Stocks, bonds, mutual funds, and variable annuities are investments. Indexed annuities, by contrast, are insurance products- similar to fixed annuities, term life, universal life and whole life. Insurance products are regulated by the 50 state insurance commissioners of the United States. Insurance products do not put the client’s money at risk, they are “safe money products” which preserve principal. Investments, by contrast, can put a client’s money at risk and are therefore appropriately classified as “risk money products;” they do not preserve principal. Not only does the SEC have no regulatory authority on fixed insurance products, but they have a vested interest in indexed annuities being regulated as securities so that they can increase their revenue and job security. In the future, if you are looking for a reliable regulatory resource on fixed insurance products (such as indexed annuities), I encourage you to seek out Susan Voss, the insurance commissioner of the state of Iowa. Not only is she credible, but 40.82% of indexed annuity sales flow through Iowa-domiciled insurance companies; for that reason she has become an authority on the products. Let me know if you need her contact information, and I happy to oblige.
Third, you make assertions that deceptive marketing tactics have been used in the sales of indexed annuities. Quite honestly, the data doesn’t support your claim. See data below from the National Association of Insurance Commissioner’s Closed Complaint Database:
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2006: 187
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2007: 235
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2008: 220
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2009: 148
Based on our research, this results in average annual complaints as follows:
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2006: 4.35
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2007: 4.12
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2008: 3.86
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2009: 3.29
So, not only have complaints on these products declined annually for the past three years, but the average has declined consistently for the past four years. Conversely, variable annuity complaints have always been greater than the number of indexed annuity complaints, and have risen in recent years. Certainly, we do strive for 100% customer satisfaction in the insurance market, but I would contend that an average of only 3.29 complaints per company is quite reasonable and not indicative of “deceptive” sales practices.
It may interest you to know that the SEC first purported that there were problems in the marketing of these products when the 151A debate first erupted. This is because Alabama securities regulator, Joseph Borg, complained about “rising variable and indexed annuity complaint levels” on the Dateline NBC program. Interestingly, after my firm provided the actual indexed annuity complaints (above) to the SEC, they changed their platform to consumer “risk” on the 151A debate.
Fourth, indexed annuities are not “complex financial instruments.” They are just fixed annuities with a different way of crediting interest. Furthermore, complexity is relative. Some would say that fixed annuities, which are the simplest retirement income product offered by insurance companies, are complex. However, if someone can understand that they have the ability to deposit their money with an insurance company, defer taxes on the monies until they begin taking income, receive 10% withdrawals of the account value annually without being subject to penalties, and have the ability to pass on the full account value to their beneficiaries upon death- then they can understand nearly every indexed annuity sold today. As far as the indexed interest crediting is concerned, 95.2% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B. My grandmother didn’t even attend college, and she understands indexed annuities.
Fifth, indexed annuities do not pay “hefty commissions.” The average street level commission on indexed annuities as of 1Q2010 was 6.34%. While it is true that there are a few of products with double-digit commissions, there are also products with commissions of less than 1%. Although the double-digit commission products are the ones that you are seeing advertisements for in magazines, these seven products (yes, only SEVEN products offer a double-digit commission!) accounted for only 2% of 1Q2010 sales. So, despite the fact that these are the annuities that are getting your attention, they are not the annuities that are selling today.
I would also be remiss, Ms. Bernard, if I did not mention that you are comparing the one-time commission paid on indexed annuities to the consistent, generous commissions that are paid on products such as mutual funds. I hardly think that this is a fair comparison, but the annuity compensation would be quite reasonable when compared to the total compensation that registered representatives receive on many securities products.
Sixth, the amendment that is pending in Congress as part of the financial reform bill would not “effectively weaken the regulation” of indexed annuities. You are obviously unfamiliar with the currently regulatory structure that dictates the sales of indexed annuities, which is in-fact, quite effective. Indexed annuities are regulated by the 50 state insurance divisions of the United States. These insurance commissioners regulate indexed annuities with rigorous standard non-forfeiture laws, advertising guidelines, suitability regulations, and other rules. The states hold the authority to take sanctions against insurance agents including, but not limited to, license revocation, penalties and fines. An interesting comparison of state and federal regulation exists relative to annuity complaints specifically. If I need to make a complaint on an indexed annuity, the state insurance division has to respond to me within ten days; and I incur no cost in my efforts to resolve the problem. Compare this with the exhaustive complaint process on the securities side; delays, lawyers, and a lot of my money spent. Yes, SEC regulation is different, but it most definitely is not better than insurance regulation.
On the other hand, the SEC (who is responsible for the regulation of investments) has their hands full with the products that they are already regulating. For example, the SEC is the organization that let Bernard Madoff swindle $50 billion from American’s retirement nest eggs. Clear warning signs of Madoff’s fraud began to emerge as much as a decade before he was caught, and yet SEC did nothing. This is the same organization that many suggest regulate indexed insurance products? These people need to rethink their inclinations. I suggest that the SEC and FINRA get their own houses in order before they decide to put more on their plates.
As you can see, there will be no “gaping hole” in protections for indexed annuity purchasers. Barbara Roper at the CFA would take well to note that as well.
Seventh, indexed annuities do not provide characteristics of “both investments and insurance” and they are not a “hybrid product.” They are fixed insurance products, regulated by insurance commissioners, where investments are regulated by the SEC. The monies that back indexed annuities are held in the insurance companies’ general account to protect the annuity purchaser from any risk. Alternatively, the monies backing investments are held in the insurer’s separate pass-through account, which passes risk of market fluctuations directly on to the investor. In addition, the indexed annuity purchaser is never put in a position at risk. They are guaranteed a return of principal, plus a minimum guaranteed interest, and never subject to losing money as a result of market fluctuations. NO INDEXED ANNUITY PURCHASER HAS EVER LOST A SINGLE PENNY AS A RESULT OF MARKET DOWNTURN. Alternatively, investors are subject to the risk of market fluctuations and may lose their original principal in addition to any gains. Indexed annuities provide limited interest which is merely based on the performance of a market index, such as the S&P 500. Securities products allow the purchaser to directly invest in the index. This being said, I think you can understand why indexed annuities are fixed insurance products, and not securities investments.
Eighth, this is not an issue of “skirting” SEC regulation. The SEC has no regulatory authority on fixed insurance products. Regulation of these products is left to the state insurance commissioners, and should continue to regulated as such in the future. We should not allow the SEC to expand their regulatory authority when they need job security and are not doing a very good job of regulating the products that are currently on their plate. There is no evidence that shows that insurance regulation of indexed annuities is not prudent; in fact, the evidence supports the fact that these products are better-regulated than investments. That being said, perhaps we should start questioning WHY the SEC is trying to expand their regulatory authority to this product.
Ninth, precisely eight insurance companies that sell indexed annuities are domiciled in the state of Iowa. As previously mentioned, nearly half of all indexed annuity sales are made through these eight companies. If the SEC is granted the authority to regulate these products, the economic impact to the state of Iowa and the NATION will be great. If Senator Harkin’s amendment is not approved, Rule 151A will cost the insurance industry far more than $2.2 billion annually. Furthermore, it will cost our nation more than 600,000 insurance jobs. More than 37,000 insurance agents will either lose business, or be forced out of the business completely if these products are regulated by the SEC. These losses cannot be replaced with securities money, jobs, and sales. The products will cease to exist (as they do today) if the SEC is given this authority. So, I ask you, “Why don’t legislators want to protect our nation’s seniors by protecting the fixed insurance status of a product which has never caused them to lose a penny as a result of market downturns?”
Tenth, investment professionals do not understand how these products work because they do not sell them. They sell products which compete against them, such as mutual funds. Mutual funds, stocks, and bonds are risk money products which put the purchaser in a position of losing their money. Safe money places, such as indexed annuities and fixed annuities, protect the purchaser from losing a single penny of their money. If more investment professionals would get out of their “sell stocks if the market is up, and bonds if it is down” mentality, they may realize that indexed annuities are a viable solution for many of their clients who are unwilling to risk their principal.
Eleventh, indexed annuities do not require purchaser to “pay stiff penalties,” if they need access to their money. All indexed annuity purchasers are given access to 10% of their annuity’s value, annually, without being subject to surrender penalties (some even allow as much as 50% to be taken in a single year). In addition, 9 out of 10 indexed annuities provide a waiver of the surrender charges, should the annuitant need access to their money in events such as nursing home confinement, terminal illness, disability, and even unemployment. Couple this with the fact these products pay the full account value to the beneficiary upon death, and I think anyone would have difficulty implying that these products are illiquid.
Twelfth, the SEC has had the ball in their court, to prove that regulating indexed annuities as securities would improve competition, capital formation, and efficiency for more than a year and a half so far, and have failed to do so. Based on my research, they will be unable to prove this because securities regulation of these products will be a detriment to the industry.
Thirteenth, most of the United States have approved a Suitability in Annuity Transaction Model Act by the National Association of Insurance Commissioners (NAIC). In addition, the companies that sell indexed annuities are using these standards in states that have not yet approved the act. The new standards have slightly strengthened the existing standards. So, the fact that no state has adopted the new standards yet is not an issue. The model regulation is very new; give the states a chance to adopt it.
Fourteenth, it is not necessary to be a registered representative to understand how to make a suitable sale. For Ms. Roper to suggest such is preposterous.
Fifteenth, indexed annuities are not marketed in a single state where there is not “effective insurance regulation.”
Sixteenth, this amendment is not being “slipped” into the legislation. It is on CSPAN all day. Every American can watch the proceedings, should they wish.
I truly appreciate your desire to provide accurate information about annuities and their protections to your readers. I am certain that both The New York Times and yourself appreciate accurate information being disseminated from your esteemed publication. A correction or retraction would certainly be appreciated on this article. Should you have a need for accurate, detailed information on annuities in the future, please do not hesitate to contact my firm.
Thank you sincerely,
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax