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.
This will potentially swing sales from one IMO to another IMO. It may also result in a reduction of sales due to a lack of support, focus and merely changing relationships. The carriers will need to determine an internal policy for allowing appointment contracts to move from one IMO to another IMO when B-Ds begin to limit FIAs sales as outside business activity. Traditionally, FIA appointment contracts allow for an amount of time to pass before the appointment is transferred, unless an IMO agrees to release the appointment early. Carriers stand to lose premium if registered representatives cannot transfer their appointment contracts to their B-D’s IMO of choice.
A swing in production not only causes fluctuation in sales; it strains relationships between IMOs and insurance carriers. Additionally, some B-Ds will undoubtedly approach FIA carriers asking to sell the annuities directly, thus cutting out the IMO entirely. This raises perhaps the largest issue for FIA carriers: what happens to sales if IMOs change? The carriers are anxiously waiting to learn the IMOs’ strategies, specifically, those IMOs changing focus to non-index annuities.
Estimating the number of insurance licensed producers who will seek the requisite securities license to sell a registered index annuity will also be a factor. Considering the SEC has not released what securities license it will require for such sales makes this task even more difficult.
While the carriers have traditionally relied on IMOs to support FIA sales, if that layer of support and expertise evaporates, carriers will need to adjust for the missing support. This includes how to replace the sale resulting from IMO distribution and evaluating the amount of company resources devoted to supporting IMOs.
As for the second timing issue, currently, Rule 151A does not become effective until January 12, 2011. It is unlikely that litigation will be complete within 2 years. The last 3 SEC rules to be challenged and defeated in court, excluding time for appeal, took between 18 and 36 months to complete. The SEC’s legal position has multiple problems as summarized by Commissioner Paredes’ dissenting opinion.
Finally, on a level playing field, with the SEC no longer having the advantage of operating under its own rule-making process, it is very possible that 151A will be defeated. The problem is that the court’s ruling may appear too late. FIA carriers will be forced to make decisions about entering the world of registered products long before the legality of Rule 151A is resolved.
Will the carriers survive litigation against the SEC? It should be expected that, faced with the delay of litigation, some index annuity carriers will weigh the uncertainty of the economy against the expense of compliance with new regulations and choose not to continue to offer index annuitiess.
Danette L. Kennedy is president of Gorilla Insurance Marketing, Inc., Waukee, Iowa. Her e-mail address is [email protected]