Many of the developments and anxieties of the first quarter of 2009 have been attributable to the financial crisis. But other equally significant causes are also reshaping the square peg of insurance products and the round hole into which they are supposed to fit.
The first is the long heralded arrival of the boomers and their changed investment tolerance and focus: they wanted products suited to retirement and their concern about outliving their assets. The inevitable answer was products with guarantees.
Creative variable annuity issuers responded with a proliferation of guaranteed accumulation, income and withdrawal benefits, with and without lifetime guarantees.
These and other products, such as synthetic annuities, entail a degree of innovation that made the old clich? of variable insurance products being the square peg to be fitted into the round hole of federal securities regulation seem to be an inadequate metaphor.
The financial turmoil as a backdrop to these innovations called for a more fitting metaphor–such as, a newly shaped peg in an ever morphing shaped hole.
Insurers, as they should, took a look at the pricing of the guarantees and their line of reinsurance for these guarantees. Sound management dictated a variety of responses: repricing, termination of certain guarantee benefits, offerings of differing benefits, and other techniques. All of this was done to respond to the financial turmoil, meet state law mandated capital requirements, as well as realize a legitimate level of profitability.
The Securities and Exchange Commission’s historic interaction with insurance has focused on assumption of investment risk by owners as the essence of variable annuities. The staff has had no framework for the risk management goals and mandates of insurance.
Example: As the now-closed annual update season evidenced, the staff has been hard pressed to deal with whether the SEC or the registrant needs to rely on Rule 485(a), 485(b), or 497. Thus, the SEC seems to have thought that the staff needed to review the changes described above. The usual SEC staff statement that it is the registrant’s obligation to determine which rule to rely upon was lost.
The SEC staff has ignored the usual standards of material fundamental disclosure and material non-fundamental disclosure. It would appear that the staff’s unfamiliarity with the heart of insurance and the newer guaranteed benefits started even before the financial turmoil took hold.
The SEC staff began and is continuing to attempt to reverse the practice of decades and create an almost irrebutable presumption that the filing of Securities Exchange Act of 1934 reports (10K, 10Q, etc.) is required of depositors of variable insurance products (the insurance companies), absent reliance on newly adopted Rule 12h-7.