If Insurance Companies Sold Goats

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I would suggest that this test is obsolete.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 He says he spends his time making paper-mache animals from out-of-date mutual fund prospectuses.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.