Agents selling indexed annuities, whose returns are tied in different ways to the performance of equity markets, should work to increase their understanding of the product and the transparency of their sales, according to speakers at a recent Annuity Roundtable here.
Sponsored by the National Association of Securities Dealers and the Minnesota Department of Commerce, the discussion focused on indexed annuities, a product developed about 10 years ago and regulated as a fixed annuity by insurance regulators.
The disconnect between state and federal regulators, and their lack of understanding of some of the products regulated by the other, was a concern for NASD Chairman and CEO Robert Glauber. As products blur the lines between insurance and securities more and more, Glauber said that forums such as the roundtable event will become important, and he called for the discussion to be continued, perhaps even as a formal working group.
Typically, according to Wendy Carlson, the chief financial officer and general counsel of Des Moines, Iowa-based American Equity, purchasers of indexed annuities are, on average, about 66 years old and buy in with $50,000. The income credits for the product are tied to the performance of an outside index, such as the S&P 500, although she added that market losses are typically only carried through as a zero percent income.
“It’s really not that difficult to follow,” she said, although other members of the panel disagreed.
Thomas Streiff, director of fund and annuity solutions at UBS Financial Services Inc., argued that while indexed annuities are only slightly less safe than other fixed annuities, those selling indexed annuities should have some specific training on the exact workings of the product, as should those looking to buy one.
“A well-trained distribution force and a well-educated client are indeed a requirement,” he said. “Some specialized training goes a long way to helping registered representatives understand what they’re offering.”
Others questioned whether indexed annuities are as safe as they have been made out to be. Alabama Securities Commission Director Joseph Borg argued that it is possible for people to lose money with products designed for the longer term, and consumers typically aren’t as aware of that as they should be.
“The product is what it is,” he said, “but the public doesn’t understand it, and God knows if the agents understand it.”
Jim Poolman, North Dakota insurance commissioner and chair of the life and annuities committee of the National Association of Insurance Commissioners, said the NAIC has developed a buyers guide for annuities, but “unfortunately, like a prospectus for a mutual fund, no one reads them.”
However, Clifford Kirsch, vice president and senior corporate counsel at Prudential, argued that roundtable members should stop trying to make consumers aware of every nuance and detail of annuities, and instead focus on what they can expect as an end result.
Consumers, he said, should be asking “what do I want the annuity to do for me,” in terms of a death benefit, annual income or investment vehicle. One possibility, he said, would be to provide consumers with an illustration of how a product has performed, as is done with other financial products.
Mark Mackey, president and CEO of the National Association for Variable Annuities, said that such illustrations can cause problems as consumers infer that those prior results will continue.
Overall, according to Insurance Marketplace Standards Association President and CEO Brian Atchinson, indexed annuities are likely to continue developing and to become increasingly complex. However, he added, this may not be a bad thing. Similarly, he said, consumers looking to buy a car understand that antilock brakes are better for them, even if they don’t understand exactly how they work. “People appreciate better products,” he said, adding that “complexity is unfortunately a byproduct of that.”