Looking back at the 2008 landscape of annuities in this time of financial crises is similar in many respects to looking at an urban landscape through the wrong end of the binoculars during a hurricane: landmarks and details are obscured, structures are diminished in size, and distances and perspectives are distorted.
The analogy is prompted by the most notable development in 2008–the Security and Exchange Commission’s proposed Rule 151A.
If adopted, the Rule would characterize virtually all marketable fixed index annuities as securities. This regulatory development seems particularly distorted as securities investors have watched in horror as their account values plummet while their index annuity owner counterparts have suffered no loss of principal and may receive a guaranteed minimum rate of interest.
The fragmentation of the excess index interest tier of the annuity as the controlling test of security status obscures the landmarks and details of relevant Supreme Court decisions, and diminishes the importance of structural guarantees.
The Rule’s diminution of the importance of guarantees in the current financial turmoil is also particularly notable, especially as this threatens the status of a variety of other annuity products that have long enjoyed the exclusion of Section 3(a)(8) of the 1933 Act.
The SEC opened and closed two comment periods on the Rule during the year, and reportedly drew 4,000 overwhelmingly negative comment letters.
On a more positive note, the emergence of at least a couple of so-called “synthetic” annuities from the SEC registration process this year represents a significant development in annuity product design.
Synthetic annuities represent the first initiative since the development of variable annuities to create a transformational product that bridges the gap between mutual funds, advisory accounts, and insurance guarantees.
The synthetic annuities are a product for this time, addressing baby boomer concerns about having a stream of income and not outliving or losing control of their assets. They also have the appeal of allowing each financial services company to do what it does best–namely, managing money (in the case of advisors and funds) and managing insurance risk (in the case of insurance companies).
But the volatility of the markets makes the distance to full emergence of synthetics as a product uncertain. Their important insurance guarantees are accompanied by the challenges of containing the risks to the insurer and pricing the products. The once close and gleaming resolution of the numerous tax issues is no longer close, distanced by Treasury’s financial crisis distractions. Thus, synthetic annuities’ full development appears very distant with no way of judging how long it will take to get there.