Insurance marketing organizations (IMOs) and similar third-party marketers need to toe the line where advertising is concerned, according to regulators in Iowa and Kansas.
In Iowa, some troublesome ads involve indexed annuities. In Kansas, the focus is on life and annuity advertising in general. In both cases, the message is that the regulators intend to clamp down on misleading promotional materials by third-party marketers.
Some IMOs are “aggressively promoting indexed annuities in potentially deceptive manners,” cautions Iowa Bulletin 14-02. Released this week, the document spells out deceptions that the Iowa Insurance Division reports seeing in this area and reminds marketers that they can be found in violation of the Iowa Code. “Fines can be substantial, ranging from $5,000 per violation to multiples of that,” Iowa Deputy Commissioner Doug Ommen told AnnuityNews.
The Kansas Insurance Department issued a somewhat similar warning in May, although the target is life and annuity marketing, with no specific comments about indexed annuity marketing. Kansas Bulletin 2014-1 warns that certain advertisements and marketing materials from IMOs and field marketing organizations (FMOs) have, “in many instances,” exhibited potential violations of the Kansas Code.
What’s going on?
Word has been circulating in industry circles for the past year that state regulators have started receiving complaints about certain types of advertisements being put out by IMOs, FMOs and national marketing organizations (NMOs).
These organizations serve as distribution intermediaries between insurance companies and independent agents who sell insurance company products. Furthermore, as Kansas notes, these firms “are playing an increasingly important role in the marketing and distribution of life insurance and annuity products as well as in the recruitment, training and education of producers.”
The rising profile of these organizations has attracted attention industrywide. So, apparently, has the advertising that some of the firms use to woo agents and promote products.
In the case of Iowa’s bulletin on indexed annuity advertising, Ommen said that the Iowa Insurance Division started noticing “advertising trends in the last year that raised concern because the ads seemed to give consumers a false impression of the products.”
The Iowa staff regularly monitors the marketplace for compliance with advertising and other matters, he noted. It also listens from complaints by producers and others in the field who monitor the advertising in their communities.
In the indexed annuity advertising, the problem trends seemed to emerge as demand for, and sales of, indexed annuities increased, Ommen said. The division’s concern here is not with the products, he stressed, noting “they fill an important need for the public.” Rather, the focus is on how the products are being portrayed to the public.
The problem areas
As the new bulletins illustrate, Iowa and Kansas have spotted several areas where advertising violations are incipient.
The Iowa bulletin identifies three areas of concern involving indexed annuities.
Promotional language around withdrawal benefit riders: IMOs and similar organizations are emphasizing high-interest lifetime withdrawal benefit riders, the Iowa document says. “Some of the advertising claims the withdrawal benefit rider has an annual rate of return, e.g., ‘client earns 8%.’ This statement is misleading if the consumer is not equally informed of the restrictions imposed by the rider.”
Uncapped rates of return: Here the concern is that when consumers view advertised claims that an annuity offers “uncapped” rates of return, it could contribute to inflated consumer expectations of future performance. If a producer reiterates the claims, that could have a similar effect. Moreover, spreads, participation rates, or the design of volatility controls can limit the rate, “significantly reducing the actual return,” the bulletin says. The conclusion: “The use of ‘uncapped’ terminology without additional disclosures of limitations is misleading. Consumers should be informed how the limitations of the “uncapped” strategy lower future projected interest credits.”
Back-casting of index performance: The focus here is on marketing materials that select a random point in time and “back-cast” the index used for interest crediting against a period of tremendous market growth, such as 1990-2000. “The back-casted index used in the advertising may not have been in existence during that time,” the bulletin says. “This increases the likelihood that a consumer may not understand how the crediting method or index may work in future years, and also increases consumer expectations of future interest credits.” Also at issue are marketing materials showing back-casting that uses newer “proprietary” indexes or more traditional indexes that were not available during the back-cast period.
The Kansas bulletin cites potential violations in life and annuity marketing. Examples include:
• Failing to identify the insurer when promoting a specific product or product feature.
• Using misleading, deceptive, and/or incomplete information intended for the general public in what appear to be bait-and-switch sales tactics.
• Including exaggerated and unsubstantiated claims regarding the benefits of a product.
• Recruiting, training, and educating producers by using misleading, deceptive, and/or incomplete material which is designed to be used for advertising to the general public.
Who is responsible?
Both state bulletins share another element: Culpability for violations goes beyond the IMOs and similar marketers.
For instance, Iowa directs its bulletin to “all insurance companies writing life and annuities in the State of Iowa.” It warns that, if ads use statements (such as those mentioned in the bulletin) without explaining the limitations, this will subject “the IMO, and any insurance company or producer that relies on, or is aware of, the use of the advertisements, to administrative action and penalties.”
All parties to the violation — carrier, IMO and producer — could be subject to fines in Iowa, or it might be that just one party would be fined, said Ommen. “It depends on who is participating and other factors.”
Kansas directs its bulletin to “all life insurers authorized to transact business in Kansas.” It says that the department “expects” insurers to treat the advertising issue as a serious matter and to take appropriate steps to ensure compliance. “Failure to do so may lead the Department to take administrative action against any life insurer utilizing IMOs and FMOs employing unfair and deceptive methods to advertise and market that insurer’s products.”
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