LifeHealth.com
151A - What impact could it have?
by Mike Janky
Mike Janky, CLU, ChFC, CFS, CAS, RHU, CASL, IAR, is president of Forward Strategies, an annuity marketing organization located in Tucson, Ariz. He can be reached at mjanky@fsib2000.com.
On June 25 of this year the SEC released a proposed ruling that rocked the insurance world. This proposal if approved would extend SEC jurisdiction to include fixed annuities as a securities product. By rule, an agent who wants to continue selling these products would have to become securities licensed and write this business through a broker/dealer. How will this rule, if approved, impact the industry, agents and ultimately the consumer?
For the most part, the primary carriers that issue these products are adamantly against 151A. Their primary source of distribution for these products is the insurance licensed agent. Should 151A be approved as is, the insurance company will then have to work through broker/dealers and the registered representative. This will dramatically decrease their volume of business as some agents will choose not to become securities licensed. For those that do become securities licensed, the product will now need to be sold by prospectus and that usually means more confusion for the both the client and the registered representative.
From the agent's point of view, the majority of licensed agents are strongly apposed to the rule. Many of the agents that sell these products want to focus on insurance and not investments. In my opinion, these indexed annuities are, without a doubt, insurance products and not securities. If the agent now has to become securities licensed, he or she will now have the added expenses of becoming registered with a broker/dealer. That includes the cost and time to take the securities exam, additional E&O insurance, administrative fees and other charges that a typically broker/dealer assesses throughout the year. These costs can add up to thousands and thousands of dollars of additional expenses.
To make matters worse for the producer, now the broker/dealer will be taking part of agent's commission. Most broker/dealers have a payout schedule of between 70 and 90 percent of gross dealer concessions. That means to the writing agent that his or her compensation would be reduced 10 to 30 percent for doing the same work.
Many broker/dealers also require that their registered representative produce a minimum amount of gross dealer concessions in order to keep their registration. It's not too difficult to understand why the agent feels so strongly about keeping these indexed annuities under the watch of the state insurance departments and not the SEC.
The ultimate loser if proposal 151A is approved will be the end consumer.
The ultimate loser if proposal 151A is approved will be the end consumer. These products have provided the policy holder a guarantee that no matter what happens in any of the indexes to which they are linked; they will have 100 percent of their principal plus any gains that have been credited in previous years. With the market hemorrhaging at every new press release, this guarantee can make the difference between sleeping at night knowing that your money is safe or worrying about turning on the television and seeing what new bad news is driving the market down along with your account balance.
The main selling points of indexed annuities since their introduction in 1995 has been safety of principal with the chance to receive higher returns than traditional safe alternatives like CDs, money markets and savings accounts. The impact of 151A would appear to have a much more negative impact on the policyholder that any positive outcomes. You will have fewer companies designing these products and fewer agents talking about them to the client. Lack of competition will produce an inferior product. So why is the SEC trying to get control of these products?
The SEC has indicated that it feels these products, if regulated by themselves, would be more beneficial to the policyholder. They cite long surrender charges and high commissions as part of their motivation to take control. Most state insurance departments have adopted rules in order to limit the length of surrender charges an indexed annuity can have. True, there are some contracts that have long surrender charges, but annuities have typically required a long term commitment from both the policyholder and the insurance company. In order for a person to benefit from tax deferral, the longer they keep their money growing in an annuity, the more they actually benefit.
Most of the annuity contracts offer 10 percent free withdrawals, full death benefit and some have a long term care benefit as well so some of the money is accessible right away. There are also products that have short surrender lengths that may be more appropriate, depending on what the client is trying to accomplish.
As far as the commissions go, 100 percent of a client's money that goes into a contract stays in the contract. Their value is not reduced by the agent commission. Compare this to mutual funds or variable annuities which have fees and charges that are deducted from the client's value.
These arguments don't hold a lot of water as far as I'm concerned. So what could be the true motivation of the SEC?
The indexed annuity business has grown to a $25+ billion a year premium business. This could become a huge source of revenue for the securities industry should 151A be enacted.
So for now, all eyes are on the SEC. Unfortunately, the SEC elected not to extend the comment period regarding this proposal. The comment period ended on September 10. With as big an impact that this ruling could have, it would have been nice to see the SEC extend this comment period to listen to all sides involved. Now the SEC is suppose to review the comments and decide whether to pass the proposal as is, modify it, or reject it. They typically take between 30 and 60 days to make decisions.
If the SEC does enact the proposal, the game won't end just yet. Many insurance companies have indicated that they are prepared to take this all the way to the Supreme Court. This might not work out well for the SEC. In three different documented court cases regarding these indexed annuities, the courts have ruled that they are not securities products and fall under the jurisdiction of the state insurance departments. Based on these rulings, the SEC may find that it has overstepped its' bounds and be directed to focus on actual securities problems.