Retaining the ability to change terms embedded in fixed indexed annuity contracts is critical to insurance companies to adjust to market changes, said a top executive of a major FIA seller.
Insurers and independent marketing organizations (IMOs) have responded to regulators’ questions about why companies can change the terms of FIA contracts after the contracts have been issued.
The comments — 15 in all — were filed as part of the insurance industry’s response to a Department of Labor proposal granting IMOs an exemption to sell commission-based FIAs under the fiduciary rule.
“The ability to adjust rates during the surrender period is part of natural product design,” said John Matovina, CEO of American Equity Investment Life Holding, one of the nation’s largest sellers of FIAs.
Matovina delivered his comments on the issue of FIA product design in a conference call earlier this month.
Insurance companies and policyholders need to retain ample latitude and “lots of options” to make changes after FIA contracts are sold to adjust to changes in the marketplace outside an insurance company’s control, he said.
Index terms are influenced in subsequent periods by market forces because option prices are dictated by market volatility and other factors.
“So while we might have to change our caps and participation rates, it’s going to be because of factors that are not necessarily, that are outside of our control,” Matovina said.
The nature of some of the questions asked by DOL regulators reveals their tenuous grasp on FIA design, he added.
But regulators raised questions about the link between contract changes and compensation ultimately flowing to agents and insurers.
To the extent that an insurance company can change participation rates, indexing methods, caps, or fees and charges during the life of the annuity, agents and insurers can directly affect their own compensation, regulators said.
Since insures can make changes during the surrender period, policyholders can find themselves facing a “lose-lose situation.” A policyholder must either accept an unfavorable change to annuity terms or surrender the contract and incur a charge, regulators said.
“To what extent can an Adviser prudently recommend a fixed indexed annuity if it is potentially subject to changes in key terms during the surrender period?” DOL regulators asked.
Regulators want to know how common it is for FIA contracts to be structured with so many embedded changes.
They also want to know how frequently insurers change key contract terms during the surrender period, what constraints are imposed on such changes by state insurance laws, the size of the surrender charges and the surrender charge calculation methodology.
Regulators also want to know if similar issues surround FIAs.
The proposed thresholds are too high and threaten to create a cartel of the largest marketers at the expense of hundreds of smaller ones, marketers claim. Cartels are often viewed as a mechanism to keep prices artificially high.
There are an estimated 350 to 400 IMOs in the U.S. and the DOL’s proposed thresholds would only guarantee that about a dozen IMOs qualify.
Under the proposed IMO exemption, known as the Best Interest Contract Exemption for Insurance Intermediaries, only IMOs with an average of $1.5 billion in premium in each of the previous three fiscal years would qualify for a financial institution exemption.
Regulators, however, say it is critical for IMOs to have built up a solid track record in the market, and to be large enough to have the technology systems and compliance frameworks in place.
Smaller IMOs could easily enter into partnerships and affiliations with larger IMOs, the regulators said.
Qualifying under the class exemption would allow IMOs and the independent agents they recruit to sell commission-based FIAs.
IMOs Seek Equal Footing
Granting IMOs financial institution status would put IMOs on the same regulatory footing as insurance companies, banks, broker-dealers and registered investment advisors.
Financial institution status is critical for IMOs because a financial institution is required to guarantee that the terms of the Best Interest Contract Exemption are upheld. BICE is required for fixed indexed and variable annuities purchased with qualified retirement money.
Insurance companies are on track to sell about $60 billion worth of FIAs in 2016 and IMOs close about 60 percent of all sales.
The fiduciary rule, set to go into effect on April 10, raises standards for investment advice and financial products sold into retirement accounts.
Opponents of the rule have turned to the courts seeking to delay its implementation but federal judges have sided with the DOL.
President Donald J. Trump has ordered the DOL to review the fiduciary rule to make sure it won’t add unreasonable costs or inhibit access to financial advice for retirees.
The DOL filed a notice seeking a six-month delay earlier this month.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].