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Regulation and Compliance > Federal Regulation

FIA sales spotlighted in DOL rule

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Fixed index annuities appear to be the product most affected by the Department of Labor’s new fiduciary standard regulation, according to analysts.

Keefe, Bruyette & Woods analysts called the decision to reclassify FIAs as eligible for sale under federal regulation instead of state regulation “a notable negative” of the final rule.

Standard & Poor’s estimated that insurers issued $50 billion in FIAs in 2015.

Fitch Ratings said the inclusion of FIAs under “the more onerous requirements of the Best Interest Contract was unexpected.”

As a result, Fitch analysts said they believe FIA issuers are not as prepared as variable annuity issuers, “who have already spent considerable time and effort preparing for the new standards.” FIA issuers also tend to be less diversified, Fitch said, “so many of the negative aspects of the new regulations will have a greater impact on them.”

KBW analysts, however, said that since the DOL did not propose changing the treatment of indexed annuities in its April 2015 proposal, potential lawsuits challenging the redesignation “might have a greater chance of success.”

KBW analysts said the largest issuer of FIAs is American Equity Investment Life Holding Co., where sales of FIAs constitute 95 percent of earnings. By contrast, KBW said, FIA sales at two companies it covers, Voya and Lincoln National, constitute less risk. Specifically, KBW analysts said FIA sales constitute less than 1 percent of earnings if sales drop 25 percent, a likely worst-case scenario.

In its comments, Fitch said that, in general, the final rules “are less onerous than expected,” which should diminish the negative impact on VA sales relative to initial expectations.

Fitch analysts said they expect the new regulations to drive changes in product offerings over time, to lead to changes in distribution strategies and compensation structures, and to increase litigation risks and operational costs for companies. However, Fitch said, over the longer term, it believes both FIA and VA issuers will be able to adapt to the new standards due to the relative attractiveness of these products in a low interest rate environment.

“Additionally, the longer phase-in period may lessen the disruption to the sales process that was envisioned and may dampen the impact of the unexpected inclusion of FIAs,” Fitch analysts said.

See also:

New DOL rule will force insurers to adapt

What does it mean to be a fiduciary?

10 compliance challenges annuity providers will face in 2016

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