Industry Stunned By Ohio National Decision To End Broker Contracts On VAs

Ohio National headquarters in Cincinnati.

"Crazy," "stunning" and "very odd" were just some of the reactions today to news from Ohio National that it will end advisor compensation on existing variable annuity contracts.

Many are calling the move a dangerous precedent for an industry that relies on a web of relationships to move products through various distribution channels.

"I have never heard of anything similar to this in the entire 20 years I have served in the insurance industry," said Sheryl Moore, president and CEO of Moore Market Intelligence and Wink Inc., publisher of Wink’s Sales & Market Report.

A legal fight to force Ohio National to honor the contractual agreements is likely, Moore predicted.

Ohio National informed broker-dealers in a Sept. 28 letter that it will terminate "any and all servicing agreements" on Dec. 12. That means all compensation, specifically trail commissions, stops on that date.

The decision is believed to be the first of its kind in the industry and affects variable annuity contracts purchased with a guaranteed minimum income benefit rider. The GMIB is appealing to clients looking for guaranteed income in retirement.

Last month, Ohio National announced that it will no longer accept any annuity applications. The insurer is focusing on life insurance and disability income insurance, a spokeswoman said.

With interest rates remaining at or near 0 since the 2008 financial crisis, insurers have struggled to meet the benefits promised by VAs sold prior to then.

Ohio National Statement

Christopher A. Carlson, president and chief operating officer, gave InsuranceNewsNet the following statement:

"We recently announced a new strategy, focused on growing our life insurance and disability income insurance businesses.

"As part of our strategic planning process, we completed a comprehensive evaluation of our entire business. Based on this evaluation, we've made the strategic decision to focus Ohio National to build on our strengths in life insurance and disability income insurance.

"This strategy will continue to reinforce our long history of mutually-beneficial relationships with broker-dealers and our network of financial professionals.

"As a result of our focused strategy in life insurance and disability income insurance, we are no longer selling new annuity contracts and retirement plans, but will continue to service and support our significant block of existing contract owners.

We believe this focus will increase our organizational agility, and our laser-focused business mix enables greater long-term financial flexibility to invest in growth opportunities."

Career Agents Unaffected

Ohio National distributes life and annuities through an independent producing general agent channel with about 11,000 agents, and through a career agency channel with about 4,000 agents, the company said. Career agents are apparently unaffected by this week's announcement.

At the time of the Sept. 6 announcement, analysts predicted no further changes to contracts.

“Ohio National is still standing behind the policies it has in force,” said Bob Garofalo, vice president and senior credit analyst with Moody’s. “From a policyholder perspective, expect no change in the level of services.”

Some major broker-dealers are deciding how to respond to Ohio National. LPL, the largest independent broker-dealer in the country, quickly signaled a willingness to fight for its brokers.

"LPL strongly believes this kind of behavior is unprofessional and disrespectful to business partners and clients," LPL wrote in a memo to its brokers. "We are actively challenging Ohio National to reverse their decision regarding compensation.

"We will make it clear to all of our other annuity partners that the Ohio National decision regarding future compensation is unacceptable. We are currently evaluating all annuity sponsor contracts and seeking to identify anything we can legally change or amend in order to protect your commissions in the future."

Clients Adrift Without Advice?

As discussions commenced on LinkedIn and other forums, many advisors said clients could be the big losers if they do not have access to advice. Exchanging their complex VA contracts for another annuity, for example, is a risky transaction to do without advice.

In a follow-up message today, Ohio National assured brokers they will not be barred from servicing their clients.

"All advisors continue to have access to their client information and can continue to service them," the Ohio National message reads.

However, servicing a contract without getting paid for it hardly seems realistic for brokers.

"If the agent's not getting any commission, what’s his incentive to properly manage the assets?" Moore said. "How are they acting in their clients’ best interest if they’re cutting their agents’ commission? It’s almost as if they’re saying 'We want you to get rid of this business.'”

It remains to be seen whether Ohio National can even walk away from its VA contracts without attracting scrutiny from regulators. FINRA regulates the broker space and a spokeswoman for the agency declined comment.

FINRA's focus in the VA space has traditionally been on exchange activity.

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].