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New Disclosure Documents Seen Aiding Annuity Purchasers

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CEOs at major life insurance companies think that providing guaranteed income in retirement is important enough to give priority to a disclosure document project for annuities.

The project encompasses variable and fixed annuities, including fixed index annuities, and could meet a disclosure requirement in the Annuity Disclosure model act of the National Association of Insurance Commissioners, Kansas City, Mo.

Companies want to “address the negative perception of annuities so that people will understand they need guaranteed income,” said Linda Lanam, a representative for the American Council of Life Insurers, Washington.

“Often, one may think of business people as not taking consumer problems seriously, but this is a customer issue,” she said. “These products will be essential in meeting retirement savings needs.”

And important to the industry as well, statistics suggest. In first quarter of 2007, total deferred annuity assets grew 1.2% to nearly $1.97 trillion, according to LIMRA International, Hartford, Conn.

Given this fact, executives at several companies who say that income planning will be important to the industry going forward discussed why disclosure and transparency are important.

As part of the Annuity Disclosure model, a disclosure document is required.

The ACLI’s CEO task force took a hands-on approach in shepherding this project, Lanam said. If a disclosure document is required, Lanam explained that the sentiment was to make it a strong enough one so that it would be used to meet that requirement.

For instance, Lanam said that under the stewardship of Thomas Marra, president and chief operating officer of Hartford Life and newly named president and chief operating officer of Hartford Financial Services Group, Hartford, Conn., the task force offered directives on the type of document they wanted to create: a simple 2-pager that answered questions that continue to come up during the sales process.

Questions covered include topics such as how money grows and how fees are applied.

Brenda Cude, a NAIC-funded consumer representative and a professor with the University of Georgia in Athens, said the project is important because its developers went right to consumers to ask them what they felt was important. Consumer focus groups gave developers a better sense of what consumers read and what they need, she added. The overall opinion of consumers that assessed the work was that it is readable, she noted.

“I think it is admirable that an industry group says, ‘We need help doing a better job,’” Cude said. There are different disclosure templates for variable and fixed annuities, she noted. “This is a requirement, and they’re saying, ‘Why shouldn’t we do the best that we can?’” she added.

“In many ways the insurance area is behind the curve, compared with other areas in the financial services industry in finding more effective ways of disclosure,” and this offers a way to catch up, Cude said.

The disclosure documents are designed to achieve 2 goals, according to Tom Bartell, assistant vice president and assistant general counsel with Hartford Life, Hartford, Conn. These goals, he continued, are “hopefully to provide more comfort and understanding of what has been purchased and, perhaps, why it has been purchased,” and to allow consumers to be “more engaged in the process.”

In the case of the deferred annuity, the income feature is an important part of the product, and there would be a brief description of a living benefit rider. “There is a real commitment to keeping this disclosure a summary,” he said.

The disclosure document would be a way for consumers to begin to get more information on what they are buying by asking the advisor additional questions or by electronically accessing more information, according to Bartell. The “layered disclosure” is an important part of this template, he said.

In fact, one of the focus groups used in the development of the disclosure document sought input from producers, he said. The reaction was positive, with many producers saying it would help facilitate a discussion of these products and the features in them, according to Bartell.

While the templates are fixed and variable, the disclosure documents are specific to a company’s product, Bartell explained. So, for instance, the disclosure would contain information on surrender charges and key fees that are specific to a specific product with a specific company, he added.

The disclosure project will be followed by a suitability initiative designed so that insurance companies can work with producers to make sure that suitability standards are followed, he said.

A lot of product information is available both in state filings and, for variable products, with the Securities and Exchange Commission, according to Rob Grubka, vice president-individual variable annuity business leader with Lincoln Financial Group, Philadelphia.

But, he continued, although it would be “easy to say that we’ve already done enough, it is better to say, ‘Let’s be proactive,’ and if you don’t think this is enough, let’s try something else.”

He said the new template offers “more concise information on what the client has bought and why.” The SEC has offered positive initial feedback to the ACLI CEO Task Force, he added.

Since the SEC is interested in making prospectuses more user-friendly, then it is an opportunity to also make insurance products used for income planning more user-friendly, Grubka said.

ACLI’s Lanam also believes the document would be a good tool for the NAIC’s InsureU program.

The disclosure pieces are being looked at on 2 fronts, Lanam said. The SEC and the NASD are looking at the variable components and the disclosure document, while a requirement for the Annuity Disclosure model is being examined by both the NAIC’s “A” and “D” committees as possible satisfaction of the disclosure document file, she continued.

Companies are developing these disclosure pieces but want to make sure they are something with which regulators want to proceed, she added.