Response: Congress Sells Out Seniors: No SEC Regulation for Indexed Annuities
July 7, 2010 by Sheryl J. Moore
PDF for Setting It Straight with CBS MoneyWatch
ORIGINAL ARTICLE CAN BE FOUND AT: Congress Sells Out Seniors: No SEC REgulation for Indexed Annuities
Jane,
Good afternoon. I am an independent market research analyst who specializes exclusively in the indexed annuity (IA) and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I used to provide similar services for fixed and variable products, but I believe so strongly in the value proposition of indexed products that I started my own company focusing on IAs exclusively. I do not endorse any company or financial product, and millions look to us for accurate, unbiased information on the insurance market. In fact, we are the firm that regulators look to, and work with, when needing assistance with these products.
I am contacting you, as the author of an article that was published at CBS MoneyWatch, “Congress Sells Out Seniors: No SEC Regulation for Indexed Annuities.” This article had numerous inaccurate and misleading statements about indexed annuities in it. I am contacting you in response to these inaccuracies, to ensure that you and your readers have accurate, unbiased information on these products in the future.
First, indexed annuities have not been referred to as “equity indexed annuities” since the late 1990’s. The insurance industry has been careful to enforce a standard of referring to the products as merely “indexed annuities” or “fixed indexed annuities,” so as not to confuse consumers. This industry wants to make a clear distinction between these fixed insurance products and equity investments. It is the safety and guarantees of these products which appeal to consumers, particularly during times of market downturns and volatility. Your help in avoiding any such confusion is so greatly appreciated.
Second, indexed annuity purchasers are not referred to as “investors.” Investors purchase investments such as stocks, bonds, mutual funds, and variable annuities- products where you can lose principal and gains due to market fluctuations. These products are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Indexed annuities are fixed insurance products; similar to fixed annuities and whole life insurance. These fixed insurance products never put the purchaser’s principal or gains at risk due to market volatility. Indexed annuities, like other fixed insurance products, are regulated by the 50 state insurance commissioners of the United States. Together, they form the National Association of Insurance Commissioners (NAIC).
Third, Senator Harkin’s amendment to the financial reform bill was not “pro-business” and “anti-investor.” It was “pro-consumer.” No indexed annuity purchaser has every lost a single penny as a result of market downturn. While the stock market collapsed in 2008 and Americans saw their 401(k) balances reduced by half, indexed annuity purchasers were sleeping soundly with the knowledge that their retirement monies were not at risk. In fact, no indexed annuity ever credits less than 0% annually in the event of market downturn. That being said, Senator Harkin’s amendment is an attempt to ensure that Americans will continue to have access to the safety and guarantees that indexed annuities offer. Not only that, it is an attempt to protect this nation’s jobs and profits. If the SEC is given the authority to regulate indexed annuities as securities, the economic impact on our economy will be more than $2.2 billion dollars annually. Furthermore, more than 600,000 insurance jobs will be lost if these products cease to be regulated as the fixed insurance products that they are. For more information on the SEC’s proposal and how it will affect our economy, please see http://www.sheryljmoore.com/2010/01/the-economic-impact-of-rule-151a/.
Fourth, it is distressing that so many continue to label the indexed annuity product based on its “woeful past,” which was only marred by a select few companies and products. The insurance industry has done a very good job of imposing strict regulations to ensure proper market conduct, suitability, product development, and sales practices in this industry. The currently regulatory structure that indexed annuities operate under is very thorough and effective. The insurance commissioners regulate indexed annuities with rigorous standard non-forfeiture laws, advertising guidelines, suitability regulations, and other rules. The states hold the authority to take sanctions against insurance agents including, but not limited to, license revocation, penalties and fines. An interesting comparison of state and federal regulation exists relative to annuity complaints specifically. If I need to make a complaint on an indexed annuity, the state insurance division has to respond to me within ten days; and I incur no cost in my efforts to resolve the problem. Compare this with the exhaustive complaint process on the securities side; delays, lawyers, and a lot of my money spent. Yes, SEC regulation is different, but it most definitely is not better than insurance regulation.
Fifth, the court instructed the SEC that in order to regulate indexed annuities, they needed to provide evidence that doing such would increase competition, capital formation, and efficiency. The SEC has had over a year to do so and has failed to even address the issue. This is because dual regulation of an insurance product would NOT increase competition, capital formation and efficiency in indexed annuity sales! In light of this delay, it is prudent for the insurance industry to proceed.
Sixth, indexed annuities’ limited growth is not based on specific stocks. They are largely based on the performance of indices such as the S&P 500 or Nasdaq-100. There are a few products which earn interest based on the performance of bonds.
Seventh, indexed annuities have exhaustive disclosures. All indexed annuity purchasers are not only given brochures that explain their prospective product purchase features, but also standardized disclosures which review items such as surrender charges, liquidity, death benefits, etc. I guess I’m just unsure why you feel that these products have a lack of disclosure? Have you ever reviewed the sales materials for an indexed annuity at all?
Eighth, what makes you think that there is a “high risk of abuse” with indexed annuities, as opposed to any other product that is sold? Quite honestly, the data doesn’t support your assertion. See data below from the National Association of Insurance Commissioner’s Closed Complaint Database on annuities:
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2006: 187
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2007: 235
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2008: 220
TOTAL INDEXED ANNUITY COMPLAINTS FOR 2009: 148
Based on our research, this results in average annual complaints as follows:
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2006: 4.35
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2007: 4.12
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2008: 3.86
AVERAGE INDEXED ANNUITY COMPLAINTS PER COMPANY 2009: 3.29
So, not only have complaints on these indexed annuities declined annually for the past three years, but the average has declined consistently for the past four years. Conversely, variable annuity complaints (which are overseen by the SEC) have always been greater than the number of indexed annuity complaints, and have risen in recent years. Certainly, we do strive for 100% customer satisfaction in the insurance market, but I would contend that an average of only 3.29 complaints annually, per company, is quite reasonable and not indicative of “abusive” sales practices.
Ninth, indexed annuities do not have “costs.” All annuities have surrender charges whether fixed, indexed, or variable- if this is what you are referring to. There are indexed annuities with surrender charges as short as three years. In addition, EVERY indexed annuity permits penalty-free withdrawals of 10% of the annuity’s value annually. Some even allow as much as 50% of the annuity’s value to be withdrawn in a single year. Moreover, 9 out of 10 indexed annuities provide a waiver of the surrender charges, should the annuitant need access to their money in events such as nursing home confinement, terminal illness, disability, and even unemployment. Couple this with the fact these products pay the full account value to the beneficiary upon death, and I think that you’ll see that consumers have tremendous access to their cash value when they purchase indexed annuities. These are some of the most liquid retirement income products available today!
If more people understood what surrender charges do for the purchaser, they would appreciate them. The surrender charge on a fixed, indexed, or variable annuity is a promise by the consumer not to withdraw 100% of their monies prior to the end of the surrender charge period. This allows the insurance company to make an informed decision on which conservative investments to use to make a return on the clients’ premium (i.e. 7-year grade “A” bonds for a seven-year surrender charge annuity or 10-year grade “A” bonds for a ten-year surrender charge annuity). Investing the consumer’s premium payment in appropriate investments allows the insurance company to be able to pay a competitive interest rate to the consumer on their annuity each year. In turn, it also protects the insurance company from a “run on the money” and allows them to maintain their ratings and financial strength. I personally appreciate the value of the surrender charge on an annuity and if more consumers understood them, they would too.
Furthermore, surrender charges are not a “secret,” as they are clearly disclosed and communicated in the disclosures that the annuity purchaser is required to sign. They are also explained and disclosed in the marketing brochures that the prospective purchaser is given.
Tenth, the “price” for the options that give the insurance company an opportunity to offer the index-linked interest on indexed annuities is something that the insurance company pays an options seller for. The annuity purchaser does not pay this in any circumstances. In addition, the investment strategy of the insurance company is not something that should be communicated to the consumer. It has nothing to do with the annuity purchase. For you to suggest that the fact that the client “never see[s] it” is preposterous.
Eleventh, the consumer doesn’t pay the sales commission on annuities. The insurance company pays the commission to the sales agent. In fact, the insurance agent is not permitted to take a check made out to them personally. Doing so can result in termination of their insurance license. All annuity purchases must have the insurance company’s name on the check.
Twelfth, where did you do your fact checking on this article? The average indexed annuity commission as of 2Q2010 is 6.35%. Although there are a total of four products in the entire indexed annuity market that pay a commission of 10% (and those products account for a mere 1.14% of total indexed annuity sales), there are also products that pay commissions as low as 0.50%. It is also quite disingenuous for you to compare the commissions paid on an annuity with other products’ commissions, as annuity commissions are paid one time, at point-of-sale. Compare this with the consistent, generous commissions that are paid on products such as mutual funds, and I think that you’ll agree that indexed annuity commissions are quite modest.
Thirteenth, the commission paid to the insurance agent on an indexed annuity has nothing to do with the index-linked interest that is credited to the annuity purchaser. For you to suggest such is simply ignorant.
Fourteenth, indexed annuities do not have “annual fees.”
Fifteenth, indexed annuities do not have “investment charges” either. I would LOVE for you to produce the sales material that said either one of these things, particularly the latter. This is specifically because indexed annuities are not investments! No compliance department would approve such an advertisement.
Sixteenth, indexed annuity purchasers do not “pay.” These products have to be profitable to three parties:
- The consumer– via fair rates
- The agent– via fair commissions
- The insurance company– via a fair spread
Seventeenth, had “the SEC been in charge,” things would probably be much different. Now that you mention it, the SEC (who is responsible for the regulation of investments) has their hands full with the products that they are already regulating at the time that they proposed regulating indexed annuities. For example, the SEC is the organization that let Bernard Madoff swindle $50 billion from American’s retirement nest eggs. Clear warning signs of Madoff’s fraud began to emerge as much as a decade before he was caught, and yet SEC did nothing. This is the same organization that you would suggest regulate indexed insurance products? I think you need to rethink their inclinations, Ms. Quinn. I believe it would be prudent for the SEC and FINRA get their own houses in order before they decide to put more regulation on their plates.
Eighteenth, the companies in the indexed annuity market DO TELL THE TRUTH. Please provide any evidence you have gathered to the contrary, as in the past twelve years that I have worked in this market I have NEVER seen any company offering indexed annuities not tell the truth. I have the distinct pleasure of working with every single one of the companies in this market, as my firm distributes sales of indexed annuities on a quarterly basis.
Nineteenth, even on the off-chance that someone would purchase an annuity from a salesperson that did not adequately explain the product (which is highly illogical), the disclosures that are left with indexed annuity purchasers communicate all of the product features in very plain English.
Twentieth, not all 10-year contracts are inappropriate for all people who are age 80. You forget that indexed annuities are quite liquid and more people are living beyond age 100 than ever before. Annuity suitability is a process which must be undertaken on a case-by-case basis. For you to suggest that a particular product is inappropriate for an entire age group is inappropriate in itself.
Twenty-first, if indexed annuity purchasers “run low on cash,” they always have the option of accessing 10% of their annuity’s value without being subject to a penalty (remember, some products allow as much as 50% to be withdrawn in a single year!). Plus, 90% of indexed annuities waive surrender penalties for emergencies such as terminal illness, disability, nursing home confinement and unemployment.
Twenty-second, the insurance industry is quick to terminate agents who use these products to “behave badly.” Not only does the insurance commissioner reserve the right to terminate agents for market conduct abuses, but so do the insurance companies that the agents are contracted with. This industry has had to fight tooth and nail to earn back a solid reputation and the companies selling these products do not take lightly to those that compromise this hard-fought position.
Twenty-third, you obviously don’t understand bonuses on annuities. A “signing bonus” is an extra incentive that is paid to an insurance agent by a marketing organization, not an insurance company, if they contract with the marketing organization to sell insurance products. What you are making reference to in your article is a PREMIUM BONUS. Premium bonuses are offered on fixed, indexed, and variable annuities alike. A premium bonus immediately boosts the annuity purchaser’s cash values. So, if I were to buy an annuity with a 10% premium bonus using a $100,000 premium payment, my cash value would be $110,000 on the day the annuity was issued. Insurance companies manage the risk of offering a premium bonus by extending or increasing the surrender charges on the annuity. While it is true that all other things being equal, a product with a bonus will have lower indexed-interest potential than a product with no bonus, this fact is fully disclosed in the brochures that are given to the client. Making the choice to purchase a product with a premium bonus is a choice for the consumer, however, not for you and not for the SEC.
Twenty-fourth, you think that the limiting of interest on indexed annuities is a detriment when it is not. To ensure that you properly understand how indexed annuities are intended to work, I would like to provide a brief overview. Indexed annuities are a “safe money place,” which protect the purchaser’s original payment. These products should be compared against other safe money places. Products like stocks, bonds, mutual funds, and variable annuities are “risk money places,” where the client is subjected to both the highs and the lows of the market (also referred to as “investments”). It is inappropriate to compare any safe money place, such as an indexed annuity, to risk money places and it is most certainly not appropriate to compare safe money places to the market index itself. Indexed annuities are not intended to perform comparably to stocks, bonds, or the S&P 500 because they provide a minimum guarantee where investments do not. Indexed annuities are priced to return about 1% – 2% greater interest than traditional fixed annuities are crediting. In exchange for this greater potential, the indexed annuity has a slightly lesser minimum guarantee. So, if fixed annuities are earning 5% today, indexed annuities sold today should earn 6% – 7% over the life of the contract. Some years, the indexed annuity may return a double-digit gain and other years it may return zero interest. However, what is most likely to happen is something in between. Were the indexed interest NOT limited, the insurer could not afford to offer a minimum guarantee on the product, and THAT is a variable annuity- not an indexed annuity. On the other hand, the client is guaranteed to never receive less than zero interest (a proposition that millions of Americans are wishing they had during that period of 03/08 to 03/09) and will receive a return of no less than 117% worst-case scenario on the average indexed annuity.
Twenty-fifth, it never ceases to amaze me how people think that the dividends of the index being excluding from the crediting calculation of indexed annuities is a bad thing. Ms. Jane Bryant Quinn- the insurance company never receives the benefit of the dividends on the index on an indexed annuity, because the client is never directly invested in the index. The insurance company invests the indexed annuity client’s premium payment in the general account, which protects them from declines in the index. The premiums are never invested in a pass-through account, which would provide the benefit of the dividends, but also expose the client to risk should the market decline. For this reason, the dividends cannot be passed on to the consumer. So you see, the insurance company cannot pass on the dividends if they do not have them to begin with.
Twenty-sixth, you do not have the slightest idea of how interest crediting works on these products. The crediting term on most indexed annuities is one year. No product credits interest “in between” this term.
Twenty-seventh, while it is true that insurance companies reserve the right to change the caps, participation rates, and asset fees on indexed annuities in years two plus, it does not mean that insurance companies do. I can name numerous companies that have never reduced their renewal rates on their indexed annuities. However, this provision is no different than that of a fixed annuity, where the insurance company has the discretion to change the credited rates in years two plus. Not to mention the fact that variable annuities have the ability to increase fees if necessary in years two plus. All fixed and indexed annuities are subject to minimum rates, as approved by the state insurance divisions that approve the products for sale in their respective states. Insurance companies are smart to protect themselves by filing products that have the ability to change rates annually, in the event of a volatile market. I personally feel much more confident that the companies offering these products today will be able to make good on their claims-paying ability, considering such flexibility in the event of unforeseen circumstances.
Twenty-eighth, it is a widely-known fact that every indexed annuity available can be compared against one another on AnnuitySpecs.com.
Twenty-ninth, states have never “ignored” problems in indexed annuity industry. Please provide evidence of this assertion, as it seems that this statement was merely pulled out of thin air. It was unnecessary for the SEC to claim jurisdiction over these fixed insurance products. It was, however, an opportunity for the organization to increase their fee income and get some extra job security during a period when many in the American bureaucracy were questioning their effectiveness.
Thirtieth, I have a big news flash for you- there has been an NAIC Suitability in Annuity Transactions Model Act since 2003. We have revised and strengthened this model several times. Most recently, this model has been updated in 2010. This most recent update is the model you are referring to in your article. It is disingenuous of you to lead your readers to believe that there were not previous protections in place prior to this model act update.
Thirty-first, the SEC and the FINRA are not credible sources of information on indexed annuities. I have had to correct them on the alert you reference more than once (see attached). The SEC is responsible for the regulation of investment products, not insurance products like indexed annuities. FINRA is the firm responsible for regulating the member firms and broker dealers that distribute investment products. Not only do the SEC and FINRA have no regulatory authority on fixed insurance products, but they have a vested interest in indexed annuities being regulated as securities so that they can increase their revenue and job security. In the future, if you are looking for a reliable regulatory resource on fixed insurance products (such as indexed annuities), I encourage you to seek out Susan Voss, the insurance commissioner of the state of Iowa. Not only is she credible, but 40.82% of indexed annuity sales flow through Iowa-domiciled insurance companies; for that reason she has become an authority on the products. Let me know if you need her contact information, and I happy to oblige.
Thirty-second, you now hold the record for the most inaccuracies about an insurance product in a single article. Congratulations! You have shown that a lack of journalistic integrity and fact checking can reach insurmountable heights. At a record 31 inaccuracies, you beat your next-nearest competitor by 20%! Why is it that there is so little regard for accuracy in the articles and communications at CBS MoneyWatch as of late? I certainly hope your readers hold you accountable. I will be making this communication available to the indexed annuity industry, in the hopes that they will let you know that it is NOT ALRIGHT TO PUBLISH UNTRUTHS ON INDEXED ANNUITIES. I certainly hope that you will consider a correction or a retraction on this article. I believe it would help tremendously in maintaining your credibility with your readers.
Should you ever have a need for the facts on indexed annuities or indexed life, please do not hesitate to contact myself or my firm. Thank you.
Sheryl J. Moore
President and CEO
AnnuitySpecs.com
LifeSpecs.com
IndexedAnnuityNerd.com
Advantage Group Associates, Inc.
(515) 262-2623 office
(515) 313-5799 cell
(515) 266-4689 fax
