July 22, 2008
The proposed rule 151A that would require equity-indexed annuities be treated as securities is not in the best interest of the American public.
Equity indexed annuities provide a no-risk opportunity to provide for retirement income with a possibility of higher than normal interest crediting. Securities are by nature risk vehicles to the principal whereby the equity indexed annuities are not.
Insurance companies have always used securities in their investment choices to provide income to the insurance company to pay interest to the annuity holders. A common practice is using bonds, both corporate and U.S. Treasury, and mortgages, which pay a stated interest rate that is higher than the rate paid to the annuity holder, and sometimes stocks for speculative gains. In doing this, the insurance company assures itself a profit margin while providing a retirement income for the policy holder. There has never been any concern by the SEC that the insurance companies should label these securities simply because the insurance company chose to invest in securities to pay policy holders the interest for growth.
With equity indexed annuities the insurance company continues the same way of investing in securities plus an added feature. They use an amount equal to a small percentage of the annuity value to purchase options (securities) on the various indexes traded on the American stock exchanges as a method of providing higher potential interest. Nothing is different except the insurance company is passing on the potential for higher than normal interest to the policy holder, depending on what the market does and with no downside risk. If the option is profitable the insurance company "cashes in" and credits the annuity value. If it is not, the option expires worthless, no interest is credited to the annuity, and the insurance company buys another option based on current pricing for the next term.
As with all insurance companies, the securities they invest in are not known to the general public because the public is not investing in the securities. The only commonality is the public can now "watch" the price of the index and realize what their potential gain might be. The specific security (option) purchased is not selected by the policy holder, nor does the policy holder have the ability to exercise or change the option. Any security used is bought by and owned by the insurance company that uses it as the basis to make money to pay interest. The securities are already regulated by the SEC.
As a 403b independent Marketing Agency, my experience has taught me the securities firms that deal on Wall Street do not use annuities as a first line of retirement savings, and if any are used the annuities are variable and tied directly to the stock market with risk to the principal. Fixed annuities are not a priority with brokerage firms. We also realize the need to provide security for clients in an extremely unstable market. We supply that by not utilizing the stocks or mutual funds that are offered by variable companies that are subject to loss of capital due to unstable market moves. The indexed annuity while its interest is created by an outside index as the SP 500, it is not directly tied to the market. None of the clients money can not ever be a negative figure. The index annuity used the SP 500 as an indicator for interest. This is a fixed annuity and should not be considered a security.
If the law is changed to label the equity indexed annuity as a security, then thousands of insurance agents will lose their primary focus of providing for their customers, and their livelihood. Most insurance companies will lose income and business due to agents unlicensed in securities not selling the products.
Lastly, the public will be deprived of an excellent way to save for the future because of loss of this valuable source that is offered presently. I assure you, the securities industry will not offer equity indexed annuities with the same effort as the insurance industry.
If fixed interest rates were 7 to 8% then there would be no need of a vehicle like the equity indexed annuity. As it is with present opportunities, low rates do not provide a potential for retirement savings and the public is looking for safety and a higher potential with no risk. Leave the equity indexed annuity with the insurance industry which has provided an excellent tract record of policy holder returns.