The Latest on the 70/10 Rule
September 26, 2012 by Sheryl J. Moore
We are receiving an insurmountable number of calls regarding the announcement of Ohio’s pending adoption of the 70/10 Rule (often referred to as the 10/10). In response, I wanted to update everyone on this anti-competitive regulation that has been adopted (in some form) or put on the table by more than one-out-of-four states in our nation. This is regulation which has been adopted on a state level at an alarming rate, as a defensive move to “protect seniors from unsuitable annuity sales.” Nevermind that the statistics on annuity complaints show that they are nominal at best, and most prevalent with variable annuities (a product that isn’t impacted by the 70/10 rule; the only type of annuity where the purchaser can lose money as a result of market performance), I just cannot seem to get the facts about this regulation out quick enough.
So, it is with the fervent hope that regulators get the FACTS, before adopting this regulation (moving-forward), that I draft this update.
1. The 70/10 Rule is desk-drawer legislation that was initially adopted by some state insurance divisions,
2. The 70/10 Rule concerns the Standard Non-Forfeiture values on all fixed annuities: traditional fixed, fixed indexed, and multi-year guaranteed,
3. This rule limits surrender charges to ten years and often 10% or less in the first year of the annuity, for states using the rule,
4. Each state has it’s own twist on 70/10: some states will permit a first-year surrender penalty of 15% if there is a guaranteed up-front bonus of 5% on the contract; some states add an age component to the rule; some states won’t allow MVAs on the contract,
5. The 70/10 Rule is not only a state approval issue, but also a distribution issue, as B/Ds have been using 70/10 as the basis for their “approved lists” since Notice to Members 05-50 was issued by FINRA (then known as the NASD) in August of 2005,
6. There have been 14 states that have used some variation of the 70/10 Rule, or are presently considering it, as of today:
e. Illinois (no longer 70/10)
g. New Jersey
k. South Carolina
7. The most recent state to adopt a variation of 70/10 is Ohio; prior to that, Florida,
9. Recently a new method of filing annuity products has become quite popular: filing via the Interstate Insurance Product Regulation Commission (IIPRC), a.k.a. “the Compact.” When an insurance company wants an annuity to be made available for sale to the residents of a particular state, filing via the Compact offers considerable advantages, as opposed to filing in each state individually. It saves time and money. You see, 41 states are currently members of the IIPRC, and if a policy filing is approved by the Compact, it is instantly available for sale in those 41 states. This is dramatically different from filing products individually with each state; this is time consuming, it costs money to file the products in each state, it drags down your speed-to-market on new products, and it typically results in more than a dozen different versions of any given product as states give objections to specific policy features that they do not want marketed on the products in their state. (Translation: increased administrative and marketing expenses.)
The problem is that the Compact uses 70/10 as the basis for all fixed annuity policy filing approvals.
So now, this is a state approval issue that eclipses the fact that more than 25% of our nation has utilized the 70/10 Rule in some form or fashion. PLUS it is a distribution issue as a result of Notice-to-Members 05-50. In short, only non-securities licensed insurance agents that do business in ten states of our nation are guaranteed that they can sell annuities with surrender charges in excess of ten years, when appropriate.
You all likely know that I do not endorse the restricting of surrender charges on annuities. Limiting surrender charges also limits commissions paid to the agent and interest credited to the purchaser. The longer period the insurer has to invest the purchaser’s premium payment, the greater gain they can pass-on to the purchaser. How can we endorse such backward regulation at a time when the retirement savers of our nation are victims of historical-low interest rates as it is?!? Couple that with the fact that they have experienced two catastrophic declines in the stock market over the past decade, and have likely lost close to 50% of their 401(k)s, stocks, mutual funds, etc. twice in the past ten years!
As a young saver, I would be LIVID if my state insurance commissioner decided that a product with a surrender charge of more than ten years was not suitable for me. I won’t be taking the money out any time soon: BRING ON THE DOUBLE DIGIT SURRENDER CHARGES! Why should I have to keep rolling my IRA annuities over every ten years, and paying another agent another commission each time? In essence, my grandma might have enough wits about her to purchase an $80,000 Cadillac, but most state insurance divisions don’t feel that she should have the choice of purchasing an insurance product that can guarantee her an income she cannot outlive. Ridiculous. This is wrong.
Notwithstanding, the insurance commissioners seem to think that the best way to limit exposure to bad agent behavior is to adopt rules such as 70/10. Way to put a product development band-aid on a market conduct problem. Show me an appointed official, and give me ten minutes in a room alone with them to present facts, facts, and more facts. This is not a rule that protects seniors. It is a rule that disparages those saving for retirement, at all ages.
Until I am elected President, it looks like 70/10 is here to stay. Keep making suitable sales. sjm