Many producers and independent marketing organizations are wondering what will become of their annuity products in the wake of the July 21, 2009 federal appeals court decision remanding the Security and Exchange Commission’s Rule 151A back to the SEC.
The rule seeks to classify fixed indexed annuities as securities.
Sources interviewed by Annuity Sales Buzz say they anticipate changes to product design, among other developments.
The changes may include more fixed account options and multi-year interest rate guarantees, as now offered on many traditional fixed annuities; simplified formulas for determining an indexed annuity’s account value; as well as more “client-friendly” surrender charge penalties.
“I anticipate that carriers will make number of changes to the products,” says Gary Raggio, a national director of annuity marketing at Dunhill Marketing & Insurance Services, San Diego, Calif. “If 151A stands, there definitely will be new product designs.”
Before the unveiling of Rule 151A, sources say, fixed indexed annuities had enjoyed a growing following among independent producers. The FIA’s signature benefits–a guaranteed rate of return with the potential to capture a percentage of equities-linked gains–were proving increasingly attractive to producers who wanted to offer clients a safe alternative to variable annuities.
Mark Ingersoll, a vice president at Washington Brokerage, Seattle, Wash., now expects that more indexed annuities will offer fixed account options and multi-year interest guarantees, as do many traditional fixed annuities.
The CD-like annuities typically guarantee the rate for the duration of the surrender charge period. Standard fixed annuities, by contrast, generally limit the guarantee for an initial period, with the interest rate fluctuating thereafter with market rates. Also, whereas traditional fixed products tie the interest rate to the going rate offered on Treasuries, multi-year rate guarantee annuities generally invest in higher-yielding corporate bonds, thereby permitting a higher payout on the annuity.
“The indexed products we sell that offer a fixed account option or multi-year rate guarantee are already taking off for us,” says Ingersoll. “Our total annuity business is up 5 times from last year. And the indexed products account for about a third of the increased business.”
Varsha Grogan, a principal at General Agents Insurance Network, Pflugerville, Tex., agrees that enhanced guarantees, among other changes to product design, can be expected. Potentially, this will enable non-securities licensed producers to continue to market FIA solutions, she says.
But Grogan anticipates that the FIA’s key benefits–the ability to benefit from market gains without bearing the attending downside risk associated with variable annuities–will remain.
Grogan also foresees a simplification of the products, notably in the formula used for crediting interest, which is based on changes in the index to which the FIA is linked.
Like other fixed annuities, FIAs offer a guaranteed minimum rate of return for a certain period, even when the market dips, sources indicate. But since the products are tied to an index, such as the S&P 500 or the Dow Jones Industrial Average, FIAs are also credited with a return based on the allowed percentage of gain in that index, if there is a gain. This percentage, known as the participation rate, typically ranges from 50% to 100% of the index price gain, excluding dividends.
Some companies also place caps on the amount of interest that can be credited to their FIA. Most of these also have a surrender charge, assessed either as a percentage of assets or as a charge to earnings. The latter, known as a market value adjustment, might kick in when the investor trades in one annuity for another paying a higher interest rate.
Though FIAs are potentially attractive to their clients, many producers have traditionally viewed the moving parts in the products–such as interest and participation rates, guarantee period, cap and surrender fees–as making for a difficult, complicated sale. That perception should change, says Ingersoll, as products offering fixed, multi-year guarantees become more prevalent.
“If the carriers simplify the products, then there may less risk for the insured,” adds Grogan. “But it may be a while before we see any substantive changes to fixed indexed annuities. Insurers typically don’t make such adjustments until they have to come out with a new product.”
Raggio is less sanguine about prospects for FIA sales, except among producers who are, or endeavor to become, securities-licensed. Those who only have a life insurance license will have access to only traditional fixed annuity products, he predicts.
Raggio allows, however, that a less stringent securities license may become available to producers to permit them to market FIAs alongside their traditional fixed portfolio.
Changes to the marketplace are already underway, he adds. His objections to Rule 151A notwithstanding–he believes the Securities Act of 1933 governing securities would have to be amended to incorporate FIAs and, thereby, permit SEC oversight–he views the developments positively.
“We’re now seeing a slight reduction in surrender charge penalties with many fixed-indexed annuities,” he says. “I’m also seeing carriers and broker-dealers taking a much harder line with their producers in respect to product suitability. So there is more securities license-type scrutiny. I think that’s a good thing.”