September 3, 2008
Im an actuary that specializes in developing annuity products. I have worked on both fixed and variable annuities at several insurance companies. From the companys point of view, these products are dramatically different.
Variable Annuities clearly pass the majority of the asset risk to the policyholder. Their surrender value is tied to a security, where they could have substantial gains or losses. The insurance company produces an annuity wrapper that simply holds this security for the owner. Other benefits may be offered by the insurance company (guaranteed death, income or withdrawal benefits), but the owners primary asset is the surrender value where the company bears little or no risk. It is and should be classified as a security.
Most Indexed Annuities have a guaranteed minimum benefit which complies with State Law (Standard Nonforfeiture Law). The law requires that the surrender value be no less than 87.5% of the premium at issue and that this minimum grow from 1%-3%, regardless of the performance of any assets backing the annuity. This is an incredibly strong guarantee compared to the lack of a guarantee provided in most variable annuities. The company clearly has significant asset risk to support indexed annuities. The owners risk is limited to how much they gain in the return of an index and can range from 0% to a potentially unlimited amount. But the owner cannot lose his principal. The insurance company guarantees the owner a significant minimum surrender value, regardless of the performance on any assets supporting the annuity. That is a dramatic difference when compared to variable annuities. The common design of and Indexed Annuity should not be considered a security.
Other concerns have been brought up in the proposed rule. Concerns such as suitability and excessive surrender charges are not unique to indexed annuities. Most of these concerns apply to fixed rate annuities also. These should be and are addressed at the state level for all fixed (and indexed) annuities. These concerns should not be included in this discussion unless it can be shown that they are unique to indexed annuities.
I recommend and request that you do not accept this proposed rule in its current state.