jump to navigation

indexed annuities July 2, 2008

Posted by Bradley in : Uncategorized , trackback

The SEC’s proposals on indexed annuities hit the Federal Register yesterday. The SEC states:

The federal interest in providing investors with disclosure, antifraud, and sales practice protections arises when individuals are offered indexed annuities that expose them to securities investment risk. Individuals who purchase such indexed annuities assume many of the same risks and rewards that investors assume when investing their money in mutual funds, variable annuities, and other securities. However, a fundamental difference between these securities and indexed annuities is that—with few exceptions— indexed annuities historically have not been registered as securities. As a result, most purchasers of indexed annuities have not received the benefits of federally mandated disclosure and sales practice protections.

The SEC says that it wants to create greater certainty as to the distinction between products which should be treated as securities and products which should not be so treated, focusing on the question of whether the purchaser “obtains an instrument that, by its very terms, depends on market volatility and risk.” In line with this concern for certainty, the proposed rules are only to apply prospectively. Moreover, insurance companies which issue annuities subject to Securities Act disclosure requirements (and which are not traded) will be exempt from Exchange Act reporting requirements because they are regulated under state law.

It’s a complex technical proposal. Part of the SEC’s analysis focuses on whether “amounts payable by the insurance company under a contract would be more likely than not to exceed the amounts guaranteed under the contract if this were the expected outcome more than half the time” (because it is this projected excess which makes the product look more like an investment than like insurance). But the proposal for how to assess this states that it is “principles-based”:

The proposed rule is principles-based, providing that a determination made by the insurer at or prior to issuance of a contract would be conclusive, provided that: (i) Both the insurer’s methodology and the insurer’s economic, actuarial, and other
assumptions are reasonable; (ii) the insurer’s computations are materially accurate; and (iii) the determination is made not earlier than six months prior to the date on which the form of contract is first offered and not more than three years prior to the date on
which the particular contract is issued.
We are proposing this principles-based approach because we believe that an insurance company should be able to evaluate anticipated outcomes under an annuity that it issues. Insurers routinely undertake such analyses for purposes of pricing and hedging their contracts. In addition, we believe that it is important to provide reasonable certainty to insurers with respect to the application of the proposed rule and to preclude an insurer’s determination from being second guessed, in litigation or otherwise, in light of actual events that may differ from assumptions that were reasonable when made.

This is pretty opaque. On the one hand, to claim to provide greater certainty through a rule which protects insurers to the extent that what they do is reasonable is odd. On the other hand, from the perspective of protecting investors, a really simple rule like “if you suggest to prospective purchasers of your index linked annuity products that they may end up better off with this product than with another annuity product which doesn’t include any link to the performance of investments you are selling a security which must be registered” would surely achieve the objective more simply (even if it might catch products which in the end function as insurance products)?

So far the reactions illustrated by comments on the SEC’s web pages are mixed. I especially enjoyed this reaction from Kennard George:

Have you asked anyone why EIA’s were created in the first place? Did they tell you it was to allow insurance agents to pretend they were competent financial advisers? And say cool, sexy things like “SP 500” and “guaranteed” in the same sentence?
When it comes to suitability, insurance agents think if a person can fog a mirror he’s suitable for an insurance policy. This proposal is the 21st century financial-services equivalent of inviting Vandals and Visigoths to a tea party. They won’t just break the crockery.
No, registering bad insurance product as a security won’t solve your problem. How about banning the issuance of EIA’s–and anything else that masquerades as a security?


Sorry comments are closed for this entry