Amid growing concerns over abusive sales practices by insurance agents, the Securities and Exchange Commission has proposed to regulate the increasingly popular indexed annuity as a securities product, a move that has sparked anxiety within the insurance industry.
That’s because the policy shift would require agents who sell the product to become registered as securities providers with the Financial Industry Regulatory Authority.
That would likely curb sales of the insurance product because the lion’s share of indexed annuities are sold through independent marketing organizations whose agents typically are not registered securities representatives, experts said.
Indexed annuities sales reached $24.8 billion last year, a 520 percent increase over the total in 1998.
“The level of sales currently being experienced in the market is unlikely to be sustained in the short term if this regulation were to go through,” said Tom Rosendale, assistant vice president of A.M. Best, an insurance rating service. “Not all agents are capable of becoming licensed because it’s a difficult process. Less people selling the product would likely mean fewer sales in general.”
Investment Risks
Traditionally, indexed annuities have been exempt from federal securities laws.
But the product’s growing popularity has been accompanied by an increase in complaints over abusive sales practices, including a lack of disclosure on how the products work and excessive commissions being collected by agents.
Indexed annuities guarantee customers a return on their principle investment, but the interest rate is tied to the performance of a market index such as the Dow Jones Industrial Average.
Since customers are exposed to investment risks, indexed annuities should be registered as securities, the SEC argues.
However, insurance industry officials say indexed annuities present minimal risks for customers.
“The SEC should go after the few bad apples rather than turn the industry upside down,” said Sean Archambault, owner of Bristol Financial Group in Ridgefield.
Archambault is a licensed securities agent, so the new regulation would have minimal direct impact on his business. However, he said he’s concerned about how it will affect the rest of the industry.
“I wonder where future agents are going to come from if this proposed regulation goes through,” Archambault said. “There is going to be a shortage of agents to provide services for people’s retirement needs.”
For example, nearly half of the sales representatives that sell indexed annuities for ING, the state’s third largest provider of annuity products, may not have securities licenses.
Company officials said that while they don’t think the SEC’s proposal will force them to change their product, it will likely affect their sales.
“It’s not the demand that will shift, it’s the distributors,” said Chad Tope, senior vice president of annuities distribution for ING’s fixed annuity business unit. “When we developed our fixed annuity product, we created it as an insurance product not as a securities product.”
Besides guaranteeing the return of the original investment, Tope said ING’s indexed annuity also promises a minimum interest rate, typical of most products in the market.
As a result, the risk held by holders is minimal, Tope said.
Archambault said people purchase indexed annuities for many of the same reasons they purchase CDs or insurance — “for the safety and guarantees.”
Recovery Rights
“If [customers] want to take the risks associated with the market they can buy a variable annuity, which is regulated as a security,” Archambault said.
Besides forcing fixed annuities agents to become registered as securities providers, the new regulation would also boost safeguards for customers, including new recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.
If adopted, the new regulation would apply to indexed annuities sold after the law goes into effect. The SEC will be accepting comments on the proposed regulation until Sept. 10.
