The insurance industry has rallied against the Securities and Exchange Commission’s Proposed Rule 151A, issued in June 2008, which would make fixed index annuities securities. The industry argues that the proposal is poorly drafted, significantly unsupported and unjustified.
But even as it submits comments before the Sept. 10, 2008 comment deadline, the industry must begin looking beyond rhetoric to the underlying FIA regulatory issues. Whether FIAs will be regulated by state insurance divisions or at the federal level via the SEC and Financial Industry Regulatory Authority, producers and insurance marketing organizations will be unable to escape change.
In particular, significant changes will occur in at least 3 areas: licensing, disclosure, and supervision.
Licensing: Currently, a life insurance license is required to sell FIAs, but critics have suggested a Series 6 securities license should be required. However, the Series 6 has no substantive information on FIAs, making it useless training for this product. Proponents of the Series 6 claim it provides general information about the markets and indices (S&P 500, Dow, etc). This weak rebuttal typifies the disconnected and ill-informed approach being taken in an attempt to fashion a remedy for FIA concerns.
Other suggestions intended to address the need for more FIA training include creating a new license specifically for FIA producers, such as a ‘Series 5′ or ‘Series 8′ (which currently do not exist). Even if federal and state authorities agree on a new license specifically for FIAs, debate is heated as to which regulator should issue it–FINRA or state insurance divisions.
Allowing FINRA to issue FIA licenses opens the door to securities regulation of a fixed insurance product. Opponents fear that, over time, FINRA will further erode state regulatory authority over FIAs. In the spirit of compromise, perhaps the National Association of Insurance Commissioners or the Interstate Insurance Product Regulation Commission could oversee this licensing.
Disclosure of information: Another criticism of current FIA regulation concerns discrepancies in, and availability of FIA information for consumers. Critics find lack of uniformity on 2 levels: 1) product information varies among FIAs in the same state; and 2) such information varies from state to state. Of most concern: Consumers seeking to compare multiple FIAs have difficulty, as disclosure forms use different terminology, explanations, and formats.
Some critics have opined that a securities prospectus is the cure, although no supporting documentation has been presented. But how many consumers would actually read, or for that matter comprehend, such a prospectus?
Before hastily adopting Rule 151A, the SEC should consider existing and proposed insurance regulatory measures aimed at strengthening consumer disclosure for FIAs. Significant measures, which the SEC has seemingly ignored, include the NAIC Buyer’s Guide (Appendix for FIAs), disclosure forms, and illustration forms.
The NAIC Buyer’s Guide explains features including caps, participation rates, surrender charges, and minimum guarantees interest rates. It also alerts consumers to examine whether the FIA is a good fit for individual needs. Currently the NAIC is working to revise this guide.
The NAIC is also working on illustration guidelines for FIAs. The FIA minimum guaranteed interest rate compared to the index-linked crediting formula is currently illustrated by few carriers. The guidelines now in development may be an extremely beneficial tool to explain to consumers how FIAs are guaranteed insurance products having the potential to earn excess interest linked to an outside index.
To further clarify FIAs, the Iowa Insurance Division is conducting a disclosure form pilot program with 17 volunteer annuity carriers. After examining and evaluating the pilot results, Iowa will likely recommend uniform disclosure requirements.
Supervision: Change is also expected in supervision of FIAs sales. The NAIC and the Wisconsin insurance department are examining current suitability models and preparing to devise an element of supervision for FIA sales. While carriers will continue to review sales for suitable recommendations, the relationship between writing agent and IMO will have to adjust in some form to accommodate new supervisory requirements.
Although it is too early to discern the exact expectations for each party to a FIA sale, the sole marketing nature of the producer/IMO relationship will need to give way to a more supervisory role.
All of this remains in the shadows of proposed Rule 151A. The specific answers remain unknown; however the questions must be explored by producers and IMOs sooner rather than later.