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If Insurance Companies Sold Goats

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The insurance industry is always on its toes to guard against the possibility of any insurance product being deemed a security by the Securities and Exchange Commission.

Thats no doubt because they are aware the National Association of Securities Dealers regards virtually everything in the financial world as a security and tends to make a grab for jurisdiction.

Insurance companies have generally adopted guidelines to be used in talking about fixed annuity products. These FA guidelines emphasize the insurance attributes of the annuity vehicles. Examples include: the minimum guarantees and protection of principal from market risk; the long-term nature of the savings instrument; the annuitization options; and the backing of the annuity by the full faith and credit of the insurer.

However, sometimes these guidelines can be a bit overzealous. I have seen more than one insurance company directive telling agents that when talking about FAs, they shouldnt use the words “investment,” “return,” or “gain.”

Oh, please! While I was driving home last night, the announcer on the public radio asked me to make an “investment.” Then, on the front door to my house, I found one of those hanging things suggesting I consider an “investment” in vinyl siding. And when I opened the mail from my daughters college, there was another request for an “investment” in her education.

In addition, my neighbor was bragging last week about the 3% return he was gaining from his “investment” in an 18-month certificate of deposit.

At no time was there any confusion by anyone that these “investments” might be confused with registered securities. These terms have become generic and no consumer is going to confuse a single premium deferred annuity with a call option.

At times, the suggestions from the insurer can be puzzling. Referencing its index annuity, one insurer advised “dont say it participates, point out that increases in the index are simply a reference point for calculating index interest credited.” Itd be rather difficult to follow this directive, because the annuity in question credits index-linked interest via a participation rate. Its impossible to discuss participation without saying participates.

The hoops that insurance compliance departments make their marketing and creative people jump through, just to eliminate the possible risk that a product might be considered a security, are ponderous.

They make me wonder what advertising guidelines would look like if the SEC regulated cows and if insurers sold goats. (See the chart for some possibilities.)

The reason insurance companies do linguistic contortions is because one of the “safe harbors” currently used to determine whether a product is insurance or a security is based on whether the marketing emphasis is on a products insurance or investment aspects.

I would suggest that this test is obsolete. More security products are offering insurance-like protection and guarantees, and almost all financial products, including insurance, have some investment features. Perhaps a better definition of the FA is a product that protects both principal and credited interest from market risk.

Insurance companies and insurance commissioners should take the initiative to update the definition of what fixed insurance products are. They are not securities. Indeed, an investment in a fixed rate or fixed index annuity produced a better return than many securities over the last two years because these are fixed insurance products. The definitions need to reflect todays reality.

Jack. Marrion is president of The Advantage Group, a St. Louis-based research firm. He says he spends his time making paper-mache animals from out-of-date mutual fund prospectuses. He may be reached at [email protected]

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.