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Post 151a World – Suitability Standards, Low Interest Rates Still Lurk

A sense of relief pervaded National Association for Fixed Annuities (NAFA) 2010 IMO Summit. The meeting capped off a year of legislative and legal victories that stunned not only seasoned lobbyists but also the people intimately involved in fighting the Securities and Exchange Commission's Rule 151A, which would have treated indexed annuities as securities rather than as insurance products.

Many on the front lines of annuity sales said the industry dodged a bullet when a court decision overturned 151A and Congress passed the Harkin Amendment, which ensured that indexed annuities would remain state-regulated.

James Jones, vice president of marketing services with American Equity Investment Life Insurance Co., said that even though his company was deeply involved in the anti-151A coalition, the outcome still exceeded all expectations.

"I was surprised that not only did we defeat 151A through the Harkin Amendment, but it also was vacated in court," Jones said. "It saved our industry - what an awesome turn of events."

Another aspect that impressed all those involved was the unity among the players in the highly competitive indexed annuity business.

Eric Thomes, senior vice president of sales at Allianz Life Insurance of North America, said even a half a year after the swirl of events that defeated 151A, a sense of disbelief remains.

"I think a lot of people are still surprised that we actually pulled together as an industry and did that," Thomes said. But the challenge remains to sell products that were so thoroughly besmirched by bad press and the financial industry. In fact, even though it was a victory that indexed annuities are still considered insurance, this can also hinder a clear understanding of the product among consumers.

"People buy life insurance because if they prematurely die there's a death benefit for their beneficiaries," Thomes said. "An annuity is just the opposite of that. That is implying when you decide to turn to income, it'll make sure you never outlive your money. And by both expertise and by law, a life insurance company is the only financial institution that can guarantee somebody they'll never outlive their money. … We have to sell the products for what they do and not necessarily what they are.

Another post-151A challenge is tougher suitability standards. The Harkin Amendment required states that do not want SEC regulation of indexed annuities to adopt the National Association of Insurance Commissioner (NAIC) model regulation on indexed annuity sales. A key requirement is for insurance companies to verify that every transaction complies with suitability standards.

Many companies and IMOs said they already meet the NAIC requirements, but some producers and carriers are nevertheless concerned about the tighter scrutiny.

Michael Prestwich, president of Imagi- SOFT, which sells annuity marketing and suitability software, said the new suitability laws are in some ways even tougher than the oversight the SEC has on broker/ dealers.

"The states, to maintain control, made their laws that rigid," Prestwich said. "So, before you send out a postcard, you have to have it reviewed by the various companies that you do business with. If you have seminars, the seminars have to be approved at the company level and registered in most states. Again, if you're working with 10 companies, somebody at each company has to approve what you say and [you have to] basically keep it extremely generic and not make any recommendations."

Some companies are deciding they don't want to take the risk in the independent insurance distribution.

"Transamerica just recently decided they weren't going to sell fixed annuities anymore through their insurance brokers," Prestwich said. "They're going to do it through the broker/dealers."

Some also believe another challenge will be the source of funds issue, which arises when money is taken from a security and used to buy an insurance product.

Mike Walters, CEO of USA Financial, said that source of funds is part of a larger push for "a fiduciary blanket that they'd like to throw across all licensure, regardless of insurance securities, RIA or otherwise."

The reasoning behind source of funds is if a salesperson is only insurancelicensed and is making an annuity sale with funds coming out of a mutual fund, then that salesperson must have given advice on a product line for which the salesperson wasn't licensed.

"It's a pretty hard argument to combat because, quite honestly, that's what took place," Walters said. He added that he sees more insurance producers getting a securities license to be able to talk about clients' finances

"When we look at our broker/dealer, 87 percent of our registered reps have a Series 7, yet we don't have a single stock jock in the house," Walters said. "The reason they have that license is essentially a different version of source of funds. They want to get access to those funds."

Even carriers that depend on the independent insurance sales channel say that although indexed annuities escaped the clutches of the SEC, producers should seriously consider getting a securities license.

"I talk quite frequently to agents who ask whether they should become registered investment advisors," said Wendy Waugaman, president and CEO of American Equity. "My advice to them is, this is where the industry is moving and where regulation in general is moving, to a system where there are fiduciary duties of advisors and a more holistic approach."

Another challenge that most people at the NAFA summit identified is frozen money. One reason people are not moving their funds is interest rates, which have been low for much longer than many advisors expected, said Tony Compton, president of Gradient Insurance Brokerage.

"We all can remember 12 to 18 months ago, talking about how low interest rates were and that they could only go one way," Compton said. "Well, we were wrong. They could go two ways, and they continued to go down. Now we have products that have extremely low crediting rates, whether it's a traditional product, a guaranteed- rate annuity or an indexed annuity. And when the final numbers come out for 2010, you're going to see the index annuity business a little flatter than what you've seen in the past."

Another reason money is not moving is because people are just plain scared. Many advisors and IMOs pointed out that trillions of dollars are sitting on the sidelines. Compton said, indexed annuities should resonate with those consumers looking for security and some upside potential.

"There's still a great marketplace for it because you're not going to lose money- that's the safety net and peace of mind- and with the evolution of income riders and death benefits, in my opinion, there's not a better place for retirees to have their money.

Others agree that a lot of retirees will be looking for what annuities can do for them. Compton said it's just a matter of inflation and time.

"The boomer generation is coming through," Compton said. "All of their money is in 401(k)s, qualified plans and the accumulation. They have to get out of the accumulation into distribution, but when they go to the distribution phase, they want to make sure they go into a product that can still credit them interest. So when interest rates come up, you'll see a big jump."

Thomes of Allianz said that message is not just for retirees looking for the best distribution of funds, but for anyone who even hopes to retire in the future.

"If you think about it, I think our average issue age on an indexed annuity is in the low 60s, but that number has been coming down over the years," Thomes said. "I always use an analogy: when my father and my grandfather planned for retirement, they planned for it in what I call thirds. One third of their retirement was going to come from Social Security; one third was going to come from their pension; and one third was going to come from their own personal savings. But I look at myself, and I go, ‘That formula just doesn't work.'"

Thomes sees a future without defined benefit plans or even Social Security.

"If it's there when I retire, that's great," Thomes said. "But I guarantee it's not going to be 33 percent of what I'm planning to retire on. So what does that mean? I don't know if the numbers now are 10 percent/10 percent/80 percent or 20/20/60, but they're not one-third/onethird/ one-third. So, more of the onus of my retirement is now on me. … One of the things we've been talking about is changing the lexicon around the word annuities and thinking about it in the terms of ‘retirement insurance' or ‘longevity insurance' or ‘inflation insurance.' When you think about a new employee sitting down with a company, the benefits people go through, ‘Here are your health insurance benefits; here are your 401(k) benefits; here's your dental benefit.' A natural transition would be, ‘What are you doing for your retirement insurance?'"

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. Steve may be reached at [email protected] Follow him on Twitter @INNSteveM. [email protected].

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