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July 20, 2009 at 08:00 PM
Swapping old annuities for new–also known as 1035 Exchanges–accounts for half of all indexed annuity sales (see NU 6/23/09) and over 80% of variable annuity sales (see NU 11/3/08). 
However, three main elements will cause annuity exchanges to drop sharply in coming years.
Increased focus on suitability in annuity exchanges. The 2003 version of National Association of Insurance Commissioners’ Model Regulation 275 required producers to make suitable recommendations for annuity buyers over age 65 (later expanded to include all annuity buyers). It also required carriers to develop procedures and reviews to detect violations. It made violations of these rules subject to “appropriate corrective action” by the state insurance commissioner.
Now comes the May 2009 revised draft of Model 275. This draft specifically says that the insurer may not issue an annuity unless the recommendation is suitable, and if the agent or supervising agency breaks the rules, they can both lose their licenses. The proposed changes affect both new sales and exchanges.
Meanwhile, in June 2009, the Financial Industry Regulatory Authority issued Notice 09-32. This specifically targets VA exchanges, reiterating changes it made to Rule 2821, which were approved by the Securities and Exchange Commission in April 2009. These changes raise the bar, and amount of paperwork required, to prove a suitable VA exchange is happening.
The FINRA changes say broker-dealers must take special notice in situations where a VA with an existing surrender charge is swapped for a VA with a new surrender charge, or if the consumer has had another VA exchange within the last three years. The B-D has seven days after receipt of the paperwork to accept or reject the exchange.
Both the NAIC and FINRA initiatives increase supervisory responsibility. NAIC’s proposal would finally be telling agents that they can lose their license for unsuitable fixed annuity sales, and telling marketing organizations that they had better supervise their agents, or else. FINRA’s Notice is sending a strong message to B-Ds that VA exchanges will be closely watched.
Neither the NAIC nor FINRA amendments are currently active. The NAIC changes need to be adopted and then implemented by the states. FINRA’s change goes into effect February 2010.
GLWBs and other riders. Guaranteed lifetime withdrawal benefits, also known under several other names, blossomed in the VA and fixed indexed annuity worlds in recent years. Today’s strained market conditions caused some carriers to pull or lessen the benefits, but based on my conversations, I believe they will stay around and grow.
Today’s popular annuity riders are guaranteeing income growth of 6%, 7% or 8% a year. This will make it difficult to leave an existing policy, especially if both future interest rates and the stock market are lackluster.
