The adoption of Securities and Exchange Commission Rule 151A has raised complex questions for index annuity carriers. Answering such questions will result in significant ramifications to this marketplace.
Timing uniquely affects 2 distinct areas for index annuity carriers. First, is it financially feasible for the carriers to make drastic operational changes in the midst of an economic crisis? Second, will the carriers survive litigation against the SEC?
Unfortunately, the timing of SEC rule 151A could not have been worse. Insurance carriers are already dealing with troubled markets. The financial crisis has put a strain on capital. It is widely predicted that 2009 will be no better.
Historically, the insurance industry has been called upon to bail out other, non-insurance related, entities, like banks. Rule 151A requires carriers to incur significant expense to accommodate new regulations, including establishing systems to manage a registered product. Compliance with Rule 151A will further strap the industry in an already unstable economic time.
SEC regulation means a different world with new rules and requirements. A prospectus will be required for an index annuity. The prospectus is drafted by lawyers, not marketing teams. It is highly regulated, filled with legal jargon and terms of art that are often seen as inflexible.
Unique marketing strategies used to differentiate one index annuity from another may no longer be available. Incentive trips, cash bonuses for production, and other perks from televisions to deferred compensation packages will be eliminated.
Therefore, index annuity carriers will need to learn and understand the restrictions and create new marketing strategies within the parameters of the rules.
Before the January 2011 effective date, a shift in fixed index annuity sales will likely occur. At some point, broker-dealers will begin requiring registered representatives, who are currently selling FIAs, to sell FIAs through the B-D. Reps selling FIAs directly through an independent marketing organization (IMO) will be forced to utilize the IMO of their B-D’s choice.