October 16, 2008
I am an independent consumer-oriented actuary (and a registered representative). I want to offer a negative perspective on Index Annuities that may not have been expressed before that to my mind should have a bearing on regulating them, though I'm not sure SEC oversight will deal with this issue as I find it, as well as State Insurance oversight, weak in handling financial product suitability/disclosure for most products (it is just very difficult to regulate marketers).
The difficulty I have with Indexed products is that it provides a hedge, one that no doubt sounds attractive to most purchasers of financial products, but one that is intrinsically flawed. The flaw is that these products are by their definitions intended to be long term products. As such, the short term risks being hedged are a waste of the buyer's money, but to not offer them would compromise the appealability of the contracts. The effect is not easily seen because of the complex and often also manipulative structure of the crediting options offered (I'm sure everyone is aware of this complex option problem, so I am not focusing on that per se). This problem is no where near the magnitude of the sub-prime and adjustable mortgage debacle, but the result (though I haven't run the numbers) is that people/seniors buying these contracts will earn less in the long term than either their fixed or variable annuity counterpart choices.
Steve Cooperstein, FSA
President & Actuary
Steve Cooperstein & Affiliates