What lies ahead as the index annuity industry, now nearly 12 years old, enters its teenage years? Here are some factors to consider.
The NASD factor. In August 2005, the National Association of Securities Dealers, in its well-publicized Notice to Members 05-50, changed the industry landscape.
At the suggestion of the NASD, many broker-dealers began requiring their affiliated registered representatives to sell indexed annuities through the B-D rather than outside the B-D. In many cases, B-Ds limited surrender charges to 10% and 10 years, and limited commissions to a level consistent with other broker-dealer-sold products. Some B-Ds required simpler product designs. They also applied company rating requirements to selected products.
In the process, “clean and simple” has become the characteristic of the leading index annuity products. This has shuffled market share of some of the top players and changed some practices, too. However, the industry has adapted.
The insurance regulation factor. The National Association of Insurance Commissioners is also moving to tighten regulation of index annuities.
With the leadership of the Iowa and Minnesota insurance departments, initiatives are proceeding to strengthen model regulations in the areas of suitability, marketing materials, and agent training.
The leading index annuity insurers, representing over two-thirds of the industry, have already committed to business practices that would be expected to meet requirements of the anticipated regulatory changes. Any new regulations should have only a limited impact on the industry.
The product identity factor. The industry has taken the initiative to rename the product as a “fixed index annuity” (FIA) in lieu of equity index annuity (EIA), its original name. The purpose is to reduce misperceptions by purchasers that the product is an equity product. This certainly does not solve all communication problems, but it is a big step in the right direction.
What of the future? Index annuities have established a solid position. According to various industry figures, the product now accounts for roughly 40% of fixed annuity sales and 13% of all annuity sales. They should be expected to maintain that position.
Although other regulatory actions cannot be predicted, the industry’s current resilience and repositioning suggest it has the capability to adapt to new requirements.