‘Crazy’ evolution of life, annuity indexes draws scrutiny, says expert

Indexed products are driving the life insurance sales train, a leading market expert said this week, but dark clouds are lurking.

For one, regulators are likely to take another look at a regulation dealing with indexed life illustrations, said Sheryl Moore, president and CEO of Moore Market Intelligence. Likewise, lawsuit activity is up, targeting a variety of sales practices associated with indexed annuity and life insurance products, she added.

The indexed products are attractive with consumers and, therefore, attractive to carriers, she said during a webinar offered by Wink. As long as sales continue to climb, Moore added, we can expect to carriers to keep pushing boundaries with indexes.

“I remember when I was super gung-ho about index products and no one was really talking about them,” Moore recalled. “We had product manufacturers that were poo-pooing the index insurance products. Some of that had to do with controversy and unsuitable sales and a cowboy mentality that we had going on at the time.

“It's so funny to me that now we have those same product manufacturers that were bad mouthing index products kind of emulating index insurance products,” she said.

Indexed annuities have a floor of no less than 0% and limited excess interest that is determined by the performance of an external index.

Index growth

Moore started Wink 17 years ago and there were a dozen indexes on which one could earn interest off an indexed annuity product. Today, there are at least 150 different indexes Wink, Inc. and Moore are tracking.

Ninety-four percent of them are hybrid indexes, she said, which include a mix of one or more other indexes, plus a cash or bond component.

“It's just crazy to me how this has evolved,” Moore said. “It's the most prolific trend in product development of index annuities right now, and it's bleeding over into index life as well. Today, when you take a look at indexed annuity sales, more than 60% of all allocations are to these hybrid indices. That's just a huge, huge shift from where we were even a decade ago.”

Most major carriers selling indexed products developed their own proprietary indexes, accounting for the growth. What gives regulators heartburn is the lack of appreciable history with the mishmash of indexes, Moore explained.

A standard index, such as the S&P 500 has a lengthy history of returns, upon which a reasonable projection can be made simply by looking back.

“When I looked at all the new hybrid indexes for last year, I think the statistic was 84% of those indexes were not 20 years old, and 92% of them were not even 10 years old,” Moore said. “So, we don't have a lot of history for those indexes. That's a problem when you're trying to say, here's the past 10 years of history of this index that hasn't existed for longer than a year.”

The problem comes when agents sell products using illustrations of possible returns. Carriers argue that the history of the components used to create their indexes have enough history to allow for illustrations.

A National Association of Insurance Commissioners’ working group debated the issue over several meetings in 2018 and 2019 before ceasing work. A 2019 proposal put forth by John Robinson of Minnesota would have doubled the time indexes must be in existence from 10 to 20 years to be used in annuity illustrations.

Industry representatives balked at the proposal, and it died.

“I'd love to see something happen with that,” Moore said, “but it's kind of stalled. This is an illustration issue. It does not affect the product development at all, because the NAIC is not putting any boundaries on what can be developed and what can't.”

'Fangs out'

There are several court cases related to cost of insurance and policy charges, and some that have been settled. Last year, USAA agreed to pay $90 million as part of a settlement for a class-action lawsuit alleging that holders of certain universal life policies were consistently overcharged.

In another care, dozens of lawsuits await the outcome of Arizona bankruptcy proceedings for Shurwest, a mid-sized independent marketing organization. Shurwest agents pushed a pension fraud scheme related to sales of indexed universal life policies sold through Minnesota Life, which is also suing Shurwest.

Shurwest executives say they had no knowledge of the scheme.

“The lawyers have their fangs out and you need to watch out because we are seeing a lot more lawsuit activity in both the annuity and life insurance space,” Moore said.

Total 2021 indexed annuity sales were $65.5 billion, Wink said. While the 3% return annuities offer is not all that sexy, Moore noted, it is very good relative to where fixed instruments are right now. CDs and checking accounts come with a interest rate less than 1%.

Some life insurance products are doing even better, Moore added.

Registered index-linked annuities, or RILAs, are the current hot-selling annuity product and are averaging annual point-to-point caps of over 6%. On the life insurance side, whole life dividends are averaging about 4.6%, Moore said.

Carriers 'playing game of chicken'

“That's really amazing considering the current interest rate environment,” she said. “And what I'm seeing is carriers playing a game of chicken trying to make sure that their rates aren't as low as the competition, or that they don't drop their dividend rates any lower than they did the year before.”

For these reasons, sales are expected to remain strong for the foreseeable future, Moore said, especially among RILAs and indexed life insurance products. Wink classifies RILAs as “structured annuities,” and Moore is anticipating a strong 2022 for these products, even though sales are flat to this point.

“We're just in the process of releasing first-quarter sales right now,” she said. “I am anticipating that those sales will be down for structured annuities this quarter, but expect that those will increase again starting next quarter and likely reach record sales in 2022.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.