FIA Complaints Rise Unexpectedly

By Linda Koco

Annuity News

The number of closed complaints involving fixed index annuities (FIAs) rose 68 percent in 2014 compared with the previous year, according to a report from Index Compendium. That’s a decided departure from the past several years, when complaints had been falling, and the researcher who has been analyzing this sudden turn said he is mystified.

The percentage is substantial but it reflects a relatively small number of complaints over all, said Jack Marrion, president of the FIA research firm that released the findings.

His company evaluates FIA complaint activity that the National Association of Insurance Commissioners (NAIC) reports annually.

In 2014, there were 77 closed complaints involving FIAs, he said. That’s up from 46 in 2013.

Closed complaints are grievances that state insurance regulators found to be valid and that they closed after resolution. States submit this data voluntarily, so the numbers may not be all-inclusive.

It’s a puzzle

Marrion told Annuity News that he is puzzled by the increase. In the past several years, the NAIC closed complaint numbers on FIAs have declined steadily, he said.

The high over the past 11 years occurred in 2007, when the closed complaint total was 230. The total has been less than that in all subsequent years. For instance, the number dropped to 206 in 2009, and then 151, 80, 50, 54, and 46, respectively, in the following years.

But then there was the surprising bump-up to 77 complaints last year.

“If there was a rising tide of complaints involving FIAs being reported by NAIC, you’d think this would have shown up in the complaints reported by the Financial Industry Regulatory Authority (FINRA), too,” Marrion said.

He checked the FINRA numbers but found no correlation.

In 2014, he said, FINRA reported only two FIA-related complaints for the entire year. Both complaints were related to a representative’s failure to disclose FIA sales activity to the broker/dealer. In broker/dealer firms, such sales are considered violations of rules prohibiting “undisclosed outside business activities.”</p>

The FINRA complaint number for the year is the same as in 2013, when the self-regulatory authority also reported two complaints involving FIAs, Marrion said.

In trying to discern what may have caused the spike in NAIC closed complaint data, Marrion said he considered shifts in product design, index strategy, suitability, distribution, misrepresentation, regulations and other possible triggering issues. But he said “nothing jumped out.”

Liquidity issues have been the top reason for complaints historically, he added, but there was no particular change he could see in that area.

“It could be that 2014 is an ‘outlier year,’” he said. In other words, the data may be something outside the norm. As such, it is something that decision-makers may want to know about but also may want to consider discounting, absent any significant reason to the contrary.

Big or not big?

In terms of overall trends, “the increase is big,” he said.  “Or is it?”

He raised the question because the 77 complaints for the year are far below the high of 230 complaints in 2007.

His analysis shows that the 2014 numbers represent one complaint for every $633 million in FIA premium. “That’s almost identical to 2011, when complaints numbered 50,” he said.

By comparison, in 2013 when there were 46 complaints, the results were better. In that year, there was one complaint for every $841 million in premium, he said. 

Going back to 2008, when there were 206 closed complaints, the picture was worse — i.e., one complaint for every $100 million.

“In 2007, when complaints numbered 230, there was one complaint for every $109 million, so that was six times worse than in 2014.”

In doing the 2014 analysis, Marrion said he looked at NAIC Aggregate Complaints, which showed 89 closed complaints involving FIAs in 2014 (and 57 in 2013). He extracted from the aggregate the complaints that were “mis-coded” (for instance, complaints against a carrier that has never sold FIAs). The resulting data refers to closed customer complaints of carriers that either currently offer or previously offered FIAs in 2013. Those carriers are associated with the 77 complaints for 2014.

The Index Compendium ranks the carriers by number of closed complaints per carrier divided by that carrier’s annual sales. On this basis, five of the carriers in the top 10 for 2014 were ranked under 10^th place last year. That is one more surprising twist to the 2014 complaint picture.

Annuity News Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].