Equity Indexed Annuities: Are they the real deal or junk products?

[JMO Fan]

Equity Indexed Annuities: Securities?

FINRA is constantly reaching for more power. They will regulate all insurance and all financial transactions if they have their way.

Brokers, advisers blast Finra proposal - InvestmentNews

That might be true, but the SEC, not FINRA, is proposing to classify all EIAs as securities. The SEC has long avoided regulating insurance -- even their newly proposed rule would leave company reporting to the states. Consumer complaints and court cases as well as brokers have pushed the SEC to act.

Federal courts have defined the requirements, including the requirements for securities licensure, suitability, and separate accounts, based upon federal securities laws. Many annuities, but especially EIAs, have stepped too far over the line from longevity-protection to investment-selling. Securities-type disclosure, including prospectuses and suitability rules, is appropriate for insurance sold mainly as investments, to protect sellers as well as consumers.

 

[URDRWHO]

Have you ever been securities licensed?

Increased fees to you (last time I paid my Series 7 it cost me $500 a year)

Increased E&O exposure ...hence increased E&O premium.

Commission sharing with BD (often 50%)

To be in securities compliance you need a separate filing cabinet for securities clients (you can NOT commingle insurance and securities files)

Each letter you get from a client must be sent to your BD.

If for some reason you are called to the FINRA arbitration board you have no rights.

Can I stop now....I can go on.

I don't know what the big stink is all about. Register them as securities and agents just have to pass another test. If they can't pass the securities test they shouldn't be talking about financial vehicles in the first place.

 

[xrac]

Have you ever been securities licensed?

Increased fees to you (last time I paid my Series 7 it cost me $500 a year)

Increased E&O exposure ...hence increased E&O premium.

Commission sharing with BD (often 50%)

To be in securities compliance you need a separate filing cabinet for securities clients (you can NOT commingle insurance and securities files)

Each letter you get from a client must be sent to your BD.

If for some reason you are called to the FINRA arbitration board you have no rights.

Can I stop now....I can go on.

URDRWHO, you love FINRA as much as the other reps I know!

 

[URDRWHO]

Re: Equity Indexed Annuities: Securities?

Apparently you need to take some classes on risk assumption and sharing.

http://www.sec.gov/rules/concept/s72297/any22972.txt
Executive Summary

EIIPs are best characterized as ordinary insurance products
with a new way of calculating non-guarantied elements.
Since most EIIPs are designed to be general account
products, the investment risk for most EIIPs is assumed
primarily by the insurer. The analysis of
disintermediation risk shows that EIIPs are placing more
risk on insurers than traditional insurance products.

That might be true, but the SEC, not FINRA, is proposing to classify all EIAs as securities. The SEC has long avoided regulating insurance -- even their newly proposed rule would leave company reporting to the states. Consumer complaints and court cases as well as brokers have pushed the SEC to act.

Federal courts have defined the requirements, including the requirements for securities licensure, suitability, and separate accounts, based upon federal securities laws. Many annuities, but especially EIAs, have stepped too far over the line from longevity-protection to investment-selling. Securities-type disclosure, including prospectuses and suitability rules, is appropriate for insurance sold mainly as investments, to protect sellers as well as consumers.

 

[JMO Fan]

Re: Equity Indexed Annuities: Securities?

Apparently you need to take some classes on risk assumption and sharing.

Thanks, I have -- finished my FSA 20+ yrs ago. Did you see this one?
http://www.sec.gov/rules/concept/s72297/hippen1.txt

4. Referring to the index to determine the rate credited on existing funds shifts the investment risk away from the insurer, placing it squarely upon the policyowner. Retention of investment risk by the insured appeared to be the linchpin in the federal court decision in Otto v. VALIC (as well as Rule 151), which declared insurance to be a security when the excess interest rate was not guaranteed prospectively for at least 12 months. Virtually no equity index products guarantee the excess interest rate prospectively.

David J. Hippen, FSA, MAAA, FLMI
Actuary

 

[URDRWHO]

Re: Equity Indexed Annuities: Securities?

When did you get your fellowship?

Since I was once thinking of becoming a fellow (I was thinking CAS), I do have a question. WTF is an actuary doing spending an ounce of energy with AFLAC? I know very well the going rate of pay for an actuary with your 20 years of experience is more valued than selling pittance policies through the duck.
Newly qualified actuaries in insurance companies earn between $91,100–$108,900.

You being an actuary, must have already figured out how the insurance company can get around all this right? Unless the SEC is ready to stop allowing the general fund of an insurance company to invest in the stock market, with a few pen strokes to a contract, the EIA can change its spots. Kind of like when the municipality says a fence can not be higher than 5 feet from the ground. You build a 2 foot mound and place your 5 foot fence on top of it and there you have a legal 7 foot fence. Ask me how I know.

Was it you that said "The SEC said indexed products were securities 20+ years ago, so this is a small step for them. If they didn't act, federal courts would probably force them to."

I was not aware that an FIA existed 20 years ago. The SEC has a different statement: They were first introduced about 13 years ago, around 1995. Statement at Open Meeting on Equity-Indexed Annuities; Washington, D.C.; June 25, 2008 (Christopher Cox)

And of course who is behind all the banter: Statement at Open Meeting on Equity-Indexed Annuities; Washington, D.C.; June 25, 2008 (Christopher Cox)
"I would also like to thank the leadership of both the North American Securities Administrators Association, especially current president Karen Tyler, and past presidents Joe Borg and Patty Struck and FINRA. Their efforts have been instrumental in bringing to light the investor protection concerns related to equity indexed annuities that we are addressing today."

Do you seriously think that there aren't bad people selling variable annuities to unsuitable owners? FINRA and all of its nonsense has never, ever, never stopped somone from doing bad things.


Oh and BTW two things:

1. If you are using your real name....that is not a good idea on the net. My 14 year old knows better.
2. If you are not the same gentleman on the American Academy of Actuaries Life Products Committee, there are court cases on using anoter persons identy.

Thanks, I have -- finished my FSA 20+ yrs ago. Did you see this one?
http://www.sec.gov/rules/concept/s72297/hippen1.txt

4. Referring to the index to determine the rate credited on existing funds shifts the investment risk away from the insurer, placing it squarely upon the policyowner. Retention of investment risk by the insured appeared to be the linchpin in the federal court decision in Otto v. VALIC (as well as Rule 151), which declared insurance to be a security when the excess interest rate was not guaranteed prospectively for at least 12 months. Virtually no equity index products guarantee the excess interest rate prospectively.

David J. Hippen, FSA, MAAA, FLMI
Actuary

 

[URDRWHO]

MA CMS rules showing the insane government bureaucratic rules...

Talking to Mary about an MA plan

Mary: I like this plan, Jean across the hall would like to hear about it. I will give you her phone number.

Agent: That is against the rules, I can not call her out of the blue.

Mary: Ok I will give you her apartment number.

Agent: That is against the rules, I can't just go knock on her door to talk to her about the MA plans.

So if Mary calls Jean and says, here Jean talk to this agent. All is ok. The outcome is the same Jean is contacted but the silly rules have been followed.

Yep....the government wonks make their handsome salary and great bene's off the backs of taxpayers and then make silly rules that we must follow.

One of my long time friends does a lot of business in Russia. He says that the Russian business climate reminds him of the 1960's. It is robust and lacks all the bureaucrat nightmares that exist now in the USA.

Although there are deep problems with a small percentage of agents in all areas of insurance, it's magnified when seniors are the target.

We have decided, as a society, that we are going to offer seniors an extra layer of protection. For example, in many states crimes against seniors carry stiffer penalties.

We see CMS going nuts with MA plans and the life insurance industry had all the warning signs that unless they initiated more internal controls regarding annuity sales someone else would take control for them.

The insurance industry, as a whole (from what I've seen) has been mainly about "just write the damned deal." That can play out in other areas....it's not going to play out in the senior market.

I do not see the ethical agents being harmed by this. In fact, the opposite would be true. Annuities are picking up some bad press which has to make them more difficult to sell.

Get rid of the bad apples, grab a securities license and those agents will earn even more money.

 

[JMO Fan]

Re: Equity Indexed Annuities: Securities?

When did you get your fellowship?

As I said, over 20 years ago.

WTF is an actuary doing spending an ounce of energy with AFLAC?

Previous job, new CEO decided to sell the block I was hired to manage. The duck was available, good short-term experience, until this job.

You being an actuary, must have already figured out how the insurance company can get around all this right?

Separate accounts, which early EIAs were in.

Was it you that said "The SEC said indexed products were securities 20+ years ago, so this is a small step for them. If they didn't act, federal courts would probably force them to."

I was not aware that an FIA existed 20 years ago. The SEC has a different statement: They were first introduced about 13 years ago, around 1995. Statement at Open Meeting on Equity-Indexed Annuities; Washington, D.C.; June 25, 2008 (Christopher Cox)

June 4, 1986 (Federal Register v 51, no. 107), SEC said all indexed products were outside the "Safe Harbor" in introducing their newly proposed Rule 151. Indexing was a big NAIC issue then, although it sold badly, so few knew. Index futures (which are used to back EIAs) were not yet available, so indexed products were difficult to offer.

FIA/EIA started before 1995, but early ones were in separate accounts.

And of course who is behind all the banter: Statement at Open Meeting on Equity-Indexed Annuities; Washington, D.C.; June 25, 2008 (Christopher Cox)
"I would also like to thank the leadership of both the North American Securities Administrators Association, especially current president Karen Tyler, and past presidents Joe Borg and Patty Struck and FINRA. Their efforts have been instrumental in bringing to light the investor protection concerns related to equity indexed annuities that we are addressing today."

SEC's 1997 "Concept Letter" discussed EIAs at length, but SEC subsequently closed their file without comment.

Do you seriously think that there aren't bad people selling variable annuities to unsuitable owners? FINRA and all of its nonsense has never, ever, never stopped somone from doing bad things.

I like my father-in-law's statement: A locked door only keeps an honest man out.

Oh and BTW two things:

1. If you are using your real name....that is not a good idea on the net. My 14 year old knows better.
2. If you are not the same gentleman on the American Academy of Actuaries Life Products Committee, there are court cases on using anoter persons identy.

The 1997 quote, including name and designation, are directly from the SEC website. I agree with it. Enjoy your speculation.

 

[URDRWHO]

Re: Equity Indexed Annuities: Securities?

Its always the new CEO and when you hit fifty you get a target on your back. Yes, consulting work is great work at home stuff.

As I said, over 20 years ago.
Previous job, new CEO decided to sell the block I was hired to manage. The duck was available, good short-term experience, until this job.

 

[JMO Fan]

Interesting 1998 study on EIA, includes some history. Fidelity Benefit had a 1980s equity index annuity. The Keyport product it mentions was in a separate account.
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