Subject: File No. S7-14-08
From: Eugene F McAlister
Affiliation: Independent Insurance Agent

September 10, 2008

As an independent insurance agent, I am writing to express my opposition to the 151-a proposal. The proposal cites issues of investment risk by the purchaser, suitability and marketing practices as reasons for their proposal. In reading the proposal, there are several points that I dispute.

My first concern is that the proposal consistently refers to Index Annuities as investments. This is not accurate and is misleading. The owner of an Index Annuity owns a contract that states a fixed rate of interest. This fixed rate may be a formula, percentage or spread. Whichever it might be though, it is still interest not participation in any stock or index. There is no investment risk because the contract owner is not invested in anything. The owner has not purchased any securities. This fact directly contradicts the second paragraph of page 6 (reiterated on page 32) which states "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." and the final paragraph on page 5 which states "Individuals who purchase indexed annuities are exposed to a significant investment risk – i.e., the volatility of the underlying securities index."

The only way the premium value (not investment) could take an actual loss is if the contract owner takes out more of his premium than originally agreed to by the terms of the contract. The surrender charge incurred is a penalty for breaching the contract and is consistent with any Fixed Annuity. That is not a securities market risk.

The final paragraph on page 5 also states "Insurance companies have successfully utilized this investment feature, which appeals to purchasers not on the usual insurance basis of stability and security, but on the prospect of investment growth. Indexed annuities are attractive to purchasers because they promise to offer market-related gains. Thus, these purchasers obtain indexed annuity contracts for many of the same reasons that individuals purchase mutual funds and variable annuities, and open brokerage accounts." I feel this is also an inaccurate statement. Having represented insurance companies and index annuities since 1997, I have found that they ARE purchased based on their stability and security the attractiveness of potentially higher interest is secondary to the guarantees provided. Our current market and credit crunch, caused in no small part by mortgage backed securities, has not cost an index annuity owner any premium. Nor did the Dot-com collapse.

This brings me to suitability and marketing. As a licensed agent in California, I have to take continuing education courses specifically related to the sale of annuities to be able to sell them. Likewise I have to take ethics courses within every continuing education period. The NAIC and state insurance departments emphasize suitability and proper marketing. This explains the Disclosure and Suitability forms that must be explained and signed when contracting. Upon delivery of the contract, the purchaser is informed of the free look period in which he may void the contract without any penalties. Not even CDs have that feature. As are all insurance products, index annuities are sold based on a needs assessment. Emphasis of their usefulness is on safety not the interest based on an index. I can not refer to index annuities as investments as the proposal does. Index annuities are a relatively new innovative product. As time has progressed since their inception the NAIC and state insurance departments have adequately addressed marketing abuse issues. Unfortunately, marketing abuses (poor sales practices) will exist in all industries to some extent, including those regulated by the SEC.

This proposal is much too important to have had such a short time frame (less than three months) for review and comments. I would question such a rush, with little advance notice, after over a decade of their availability. As the proposal mentioned, billions of dollars have gone into index annuities over the years. I can only deduce that the increasing popularity of these safe annuities is drawing billions of dollars away from the securities market. With the exodus of the baby boomers from the work force, safety will surely look good and risk associated with the market wont, meaning the exodus of many more billions. That doesnt justify the 151-a proposal.

Index annuities are a fixed annuity with an innovative means of crediting interest. They involve no ownership of any securities and thus have no risk. Like other annuities they have guaranteed minimums, tax deferral and the possibility of income for life. They are insurance products best left to the NAIC and state insurance departments to regulate.

Cc: Barbara Boxer US Senate
Dianne Feinstein US Senate
Nancy Pelosi Speaker of the House
Charles Schumer Joint Economic Committee Chairman
Christopher Dodd Senate Committee on Banking, Housing and Urban Affairs Chairman
Barney Frank House Financial Services Committee Chairman
Max Baucus Senate Committee on Finance Chairman
Chuck Grassley Senate Committee on Finance