In this post-election period, it is appropriate, but coincidental, that the subject of this article is the need for indexed insurance industry unity and consensus.
Further to the political note is this famous remark by Benjamin Franklin, made at the signing of the Declaration of Independence: “We must all hang together, or assuredly we shall all hang separately.”
The need for industry unity and consensus arises, in part, because regulators are on a path to reach unity and consensus on regulation.
As has been the subject of numerous regulatory actions and media reports, indexed insurance products are under regulatory scrutiny by both federal and state securities and insurance regulators. In the spirit of consensus, giving even the most hostile of scrutinizers the benefit of the doubt, each is motivated by the obligation to fulfill its regulatory duties as circumstances demand.
The proliferation of indexed product designs and increasing sales are sufficient rationales for the current regulatory diligence.
As the result of the roundtable on annuity products, sponsored by the National Association of Securities Dealers and the Minnesota Department of Commerce on May 5, 2006, regulators appear to be working toward a consensus on who should–and how to–regulate indexed products.
Indexed product manufacturers and producers need to do the same.
Industry unity and consensus is a must now because the current enhanced regulatory scrutiny is not going to go away as it did in years past. This is for the same reasons that initiated the current scrutiny: the proliferation of indexed product designs, increasing sales, and the perceived need for regulators to fulfill their regulatory obligations.
From all reports, this scrutiny is not the result of customer complaints, which apparently have been few and far between.
Moreover, now is not the first time that regulators felt obliged to take specific and public action.
The most recent occasion, other than NASD’s NTM 05-50 in August 2005, was prior to the now fading mutual fund late-trading/market-timing debacle that surfaced in late 2003. Federal securities regulators were known then to be making indexed product securities law status consideration a priority after the learning period that followed the review of the responses to the Securities and Exchange Commission’s Concept Release in 1997. The drain on SEC staff resources resulting from the mutual fund morass probably was the indexed products’ reprieve.
Manufacturers and producers cannot assume that another unrelated scandal will take them off the federal or state radar screens this time around.
As many know, not only state insurance departments but state securities administrators are very active in this area.
In fact, the state securities administrators’ focus, as much as NASD’s activities, may be sufficient reason for manufacturers and producers to welcome federal securities regulators’ review–and to cooperate amongst themselves. Although the SEC does not dictate state determinations, its pronouncements and standards are not ignored by other entities, including state agencies and the courts.
The remainder of this article requires a “disclaimer.” The author has been and remains a promoter and defender of indexed products since they first appeared in the market in 1995. The following criticisms are made in those same interests.
The indexed products industry needs unity and consensus in terms of a shared attitude and approach.
This, of course, does not mean any common action that could be construed as contrary to anti-trust prohibitions. And this does not mean that individual companies can’t pursue their own interests according to their best lights. But, for the good of the industry, companies should pursue their individual interests with the shared attitude and approach of respecting regulatory concerns and serving the best interests of customers.
Take, for example, the complexity of designs. Is it motivated primarily by interest in providing the public with a product that is better, or is it beating the competition?
Is it done with enhanced investment risks to the manufacturer and related pricing and features that lead to paring back the benefits and shifting some of that risk to the insureds to a point that pushes the envelope on securities law status? (In this regard, too lengthy a surrender charge period may well be a feature the SEC and others regard as a negative in their analysis.)
What will be the impact on hedging costs and product guarantees?
Does the complexity lead to valid questions about whether producers, never mind insureds, are likely to understand the products without advanced degrees in hedging strategies or actuarial science?
These are just some of the many questions raised by complexity for competition’s sake.
This is not an argument for mindless simplicity. Rather, what is needed is mindful complexity.
Neither is this an argument for curtailing creative product development. Competition also promotes the drive for speed to market–another worthwhile goal, but not when it severely limits the involvement of the manufacturers’ watchdogs of regulatory compliance. Achieving unity and consensus means including all of the people with unique skills at the manufacturer involved in the creative process from the beginning.
If the above cautions have not totally alienated index product professionals, the next point might.
In real estate, the clich? is, “It is about 3 things: location, location, location.” When building unity on the indexed products front, the mantra needs to be “education, education, education.”
Simply put, industry unity and consensus require that more manufacturers and promoters learn what the regulatory issues are concerning index products.
A distressing number of missteps that have occurred were not the result of greed or lawlessness, but of unawareness of the regulatory risks and rudimentary standards that need to be met. For instance, much of the shock over NASD’s NTM 05-50 resulted from disbelief that NASD was there and watching index product sales.
Education of organizations and others, including the competition, producers and the regulators, can only inure to the benefit of an index product company.
With regard to educating the regulators, this is a situation where the predictable answer will be “no” if the regulator doesn’t understand the products well enough to say “yes,” and there are some regulators like that. Thus, to end on a paraphrase of a less prestigious quote than Franklin’s: An educated regulator is a firm’s best customer.