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Regulatory Pressure Could Impact Fied Inde Annuity Design

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The current year was not revolutionary on the index annuity product innovation front. Return of premium options were made available on a few new products, and the concept of soft caps was revisited. However, carriers pretty much stuck with the tried and true.

The split in product design based on the intended distribution channel did continue through 2005. The bulk of the products are designed to appeal to the annuity seller market channel with the attendant premium bonuses, higher commissions and longer surrender charges needed to pay for it all.

However, a growing number of carriers came out with annuities offering more straightforward designs, 5- to 7-year surrender periods and lower commissions.

Although the agent has strongly influenced product design in the past, next year could see designs driven by hints of regulatory desires if not by direct fiat.

Recently a handful of states have implemented, or have discussed implementing, a 10/10 rule. This means the annuity will not receive approval if the contract’s surrender charge exceeds 10 years, or if the first-year surrender penalty is in excess of 10%.

If the 10/10 movement gathers steam, it could directly challenge the current marketplace of high premium bonuses and products with double-digit commissions.

Over three-quarters of index annuities have maximum issue ages of 85 or older. Although the maximum issue age is set by the carrier and not by statute, and even though complaints to regulators do not seem to increase with age of the customer, it does appear that the loudness of any claim of “senior abuse” increases geometrically as age increases.

We are hearing discussions from carriers about lowering maximum issue ages, or dramatically reducing the surrender charge for purchasers over age 75.

One of the legs enabling index annuities to stand as fixed products and not be classified as securities is the product’s minimum guarantee of principal. The Securities and Exchange Commission’s understanding, as stated in Rule 151, is this minimum would at least be 3% interest earned on 90% of principal, which would make the annuity buyer whole in less than four years. However, the vast majority of index annuities currently available have a lower minimum guarantee.

It would not be surprising to see the SEC revisit this area and issue a tighter definition of the minimum needed so as not to be classified as a security.

The mischievous theatrics of the National Association of Securities Dealers is having the unfortunate effect of having securities broker-dealers determine firm requirements for non-security products, including fixed annuities. Although these annuity requirements are arbitrary–the NASD cannot legally tell a broker-dealer how to treat a non-security product–carriers are being forced to react as broker-dealers attempt to satisfy the whims of those in NASD management.

There are also one or two loose cannons out there on the regulatory front that have simply decided they do not like annuities. These individuals will use any pretense to discourage purchases; their stated concerns do not appear to be design related.

Perhaps the best recourse for all annuity carriers is to withdraw from these areas and await the toppling of these people by their constituents.

All in all, the biggest changes in index product design in the coming year may not reflect financial markets, new ideas or consumer needs. Rather, they will probably reflect reaction to regulatory pressure.

Sheryl Moore is principal of, an index annuity resource in Des Moines. Her e-mail address is [email protected]. Jack Marrion is president of Advantage Compendium, a St. Louis, Mo., research and consulting firm. His e-mail address is [email protected].