Fiduciary Rule to Affect Fixed Annuities, Credit Suisse Says

By Arthur D. Postal
InsuranceNewsNet

WASHINGTON – The new fiduciary standard proposed by the Labor Department targets the sale of securities products such as variable annuities, but will likely also pull fixed indexed annuities into the picture, according to a Credit Suisse investment note.

That is for two reasons: The proposed rules include a reasonable compensation standard and a letter sent by Sen. Elizabeth Warren included insurers that sell primarily fixed indexed annuities (FIAs) along with companies that sell variable annuities (VAs), according the note, written by Thomas Gallagher of Credit Suisse.

The proposal does not require FIAs to undergo the same compliance procedures and the fiduciary contract that VAs do, but they would both be subjected to the new “Impartial Conduct Standards” in the rule.

These standards specify that advisors must 1) provide advice that is in the client’s best interest and 2) not recommend assets that pay advisors what the DOL called “unreasonable compensation.”

“Reasonable compensation will be under the microscope with FIAs as the selling practices are less known since the products do not require a prospectus outlining commissions,” Gallagher said. Companies that would be most directly affected by slowing FIA sales would be American Equity Investment Life and Symetra Financial, as well as Lincoln National to a lesser degree, Gallagher said.

Gallagher said VAs will bear a significant impact.

“The increased scrutiny on the industry will impact both the product structure as well as sales volume,” said Gallagher, who added that carriers have already been de-risking VAs, “which include fewer living benefit guarantees and volatility controlled portfolios which limit upside for the client. While the product action taken by the industry over the past few years has been positive for risk management, we would point out that less value can be attributed to guarantees.”

Gallagher also referred to a letter written last week by Warren, D-Mass., to the top 15 annuity writers. The letter demands data regarding the “lavish” sales incentives provided to agents who sell annuities. Warren contends that providing incentives may be a direct conflict to their fiduciary duty.

“Senator Warren’s letters included insurance companies selling primarily Fixed Indexed Annuities which indicates to us that these products will also be scrutinized despite what appears to be slightly more lenient treatment in the DOL proposal,” Gallagher wrote.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].