It’s no secret that there are a lot of conversations taking place these days about the regulation of annuity products. Many of these discussions stem from some very pointed criticisms of annuities and, specifically, fixed index annuities, or FIAs.
Much of this talk has created a very unbalanced picture of FIAs. But it can also serve as an important opportunity to bring even more clarity to the industry and most importantly, for the consumer.
First, some key facts about FIAs. For more than a decade now, millions of Americans have been very satisfied with their FIA purchases and regard them as safe and valuable additions to their overall financial planning. The FIA business was started in the United States by just a few insurers in the mid-1990s. Today, there are 47 companies, with total annual premium of more than $27 billion.
The primary reason FIAs are so popular is that they represent an innovative idea for addressing emerging needs.
We all know that Americans are living longer than ever before. As longevity increases, so does the need to supplement other sources of retirement income like Social Security and pension plans. Today, more than ever, people are seeking safety, stability, savings, and income through tax-deferred growth. They value the opportunity to receive a guaranteed income for life.
FIAs address these needs by allowing the consumer to receive the guarantees of a traditional fixed annuity (as required by non-forfeiture laws) while providing the opportunity to receive interest credits based on the performance of a market index.
The journey that FIAs are on currently is similar to what happened with universal life. I’m sure many National Underwriter readers remember what the initial perceptions were of UL.
At the time, the life industry was dominated by whole life policies and companies wanting to protect the past. Ultimately, though, the industry, distribution, and the consumer came to understand the value of UL. This brought the product from “maverick” status to mainstream acceptance.
I believe the same holds true for FIAs.
I further believe the main cause of all of the critical rhetoric regarding FIAs today is not a function of the design of the product itself, but rather a lack of product knowledge by FIA critics and a limited number of highlighted cases where suitability is called into question.
Just as with other annuities and all financial services products, proper sales practices and suitability standards must be established and adhered to in FIA distribution. There is still work to do to bring more clarity to the regulation of FIAs and to all annuities.
Therefore, the time is right for meaningful collaboration among insurance product regulators to ensure a regulatory system that provides effective consumer protection — without diminishing the ability of the industry to bring innovative products to market quickly.
A regulatory environment with clear standards, appropriately tailored to the products being sold, will allow the industry to ensure that all consumers fully understand the benefits of the products they are considering purchasing.
This is not to imply or advocate a “one size fits all” set of regulations or a convergence among existing regulatory organizations. Rather, it advocates having these organizations work together to develop rules and regulations that appropriately take into account the similarities — as well as the differences — among the products.
For example, there is a need for clear standards for a point-of-sale document that would provide straightforward and succinct disclosure to prospective annuity purchasers. In light of the differences between variable annuities, traditional fixed annuities and FIAs, the disclosure documents for each would not be identical. However, they could be similar in a way that facilitates comparisons and enables consumers to make informed decisions.
Of course, successful collaboration of any kind always depends on each key stakeholder seeking the same goals. By listening to statements of the most prominent industry organizations (including National Association of Insurance Commissioners, National Association of Securities Dealers and the Securities and Exchange Commission), the industry can discern themes about the importance of proper disclosure, suitability, and agent education. The position of the insurance industry really should be no different: strengthen these areas and ensure that every sale of a FIA, variable annuity, or traditional fixed annuity is appropriate.
This can be done by creating an environment that allows the annuities industry to continue its tradition of innovation. With clear, effective standards for all annuities, the business can continue to provide consumers with meaningful products that help fund their retirement.
Everyone in the annuities industry has the same ultimate goal — to meet the needs of the consumer. That is what success in the market is all about. So the industry needs to continue supporting the value of consumer choice and work together to provide those choices.
FIAs have expanded the spectrum of choice and have earned a rightful place in the total array of retirement planning options.
The history of annuities is built on responding to continuing socioeconomic changes and effectively addressing the financial needs of Americans. Let’s continue this tradition by embracing the kinds of change within the industry that ensure consumers will have meaningful choices for achieving financial independence.