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October 30, 2014 at 04:11 AM
“Quite possibly.” That’s the short answer.
It’s funny how quickly we forget the past. Let me take you back to 2010. Anyone working in the fixed annuity market dodged a potentially career-ending bullet when Rule 151A was vacated by the DC Circuit Court Of Appeals following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. For those not familiar with Rule 151A, it would have transferred the supervision of fixed indexed annuities from insurance regulators to securities regulators. Stated simply, indexed annuities would have been considered securities in a post-151A world. Thanks to the efforts of the National Association for Fixed Annuities and many others in our industry, a sound decision was ultimately made to keep fixed indexed annuities where they belong — as a class of fixed annuity supervised by the NAIC.
Today, I look back on 151A and view it as a shot across the bow of a ship called Up Not Down. It was a message that we need to be clearer in our communications with consumers and to be certain we were portraying indexed annuities as the safe money products they were initially designed to be.
It was also a message to set realistic interest rate expectations. Fixed annuities are not securities. They don’t put any of the premium or interest earnings at risk, and they afford our clients the opportunity to achieve better interest rates, which should outperform other safe money vehicles. And to that goal, they have delivered. You needn’t look any further than your clients’ indexed annuity statements this past year. Regardless of what crediting strategy you selected, your clients probably earned far more interest than the banks offered. But if you’re still a skeptic, go find yourself a copy of “Real World Returns,” by Jack Marrion. You’ll quickly see that fixed indexed annuities do, in fact, deliver better interest rates than other safe money vehicles.
What I see in the market today concerns me a bit. Carriers are playing with fire in their next generation of products, getting further away from the basic value proposition of fixed indexed annuities. It’s a game of Russian roulette; only in this game, the gun is loaded with multiple bullets. Eventually, the gun goes off and there are casualties. Will you be among them?
The first bullet: the uncapped game
In September of this year, the Iowa State Insurance Department fired yet another warning shot in Bulletin 14-02, warning IMOs, agents and carriers of the pitfalls surrounding the deluge of so called “uncapped strategies. Read for yourself:
“…the Division reviewed advertisements on annuity products in which the advertisements offer ‘uncapped’ rates of return. While much of the observed advertisements purport to be targeted at insurance producers, if the advertising is viewed by a consumer it has the capacity to contribute to inflated expectations of future performance of the annuity product. These expectations are likely to be inflated indirectly through subsequent and related representations made by producers reiterating the advertisements’ claims although, in reality, the referenced rate is actually limited by spreads, participation rates, or the design of volatility controls, significantly reducing the actual return.”
