July 11, 2008
Issues:
Potential indexed annuity losses.
Variablity in crediting rates.
Suitability.
You have asked for comments as to your proposed regulatory changes. Herewith are mine.
Currently fixed annuities are regulated by the state department of insurance. The supreme court ruling gives the insurance departments regulatory authority (not the SEC) when considering traditional fixed annuities. It is my understanding that indexed annuties were not considered at the time of the ruling. The characteristics of a fixed annuity are principal protection combined with a minimal rate guarantee although the annual crediting rate may vary from year to year. Hence a tradtional fixed annuity features an annual crediting rate that varies from year to year, similar to an indexed annuity.
Typically the range of variability of crediting rates on tradtional fixed annuities is between about 3% on the downside and unlimited on the upside, but typically close to CD yields. With an indexed annuity the crediting rates may vary between 0% and and a perhaps a higher limit. Both feature variable yields that may, and in almost every case does, exceeed the guarantee rate. The indexed annuity simply provides a greater range of possible outcomes.
You state in your position paper that the SEC should oversee annuties whereby the credited rate exceeds the guaranteed rate. Well under this guideline you would need to regulate traditonal fixed annuities which will not be the case. Hence your definition is in conflict with the current supreme court ruling.
Next you state that indexed annuity purchasers can lose money. True, however much less downside that stocks or mutual funds. A simple regulatory change can avert that issue by requiring a return of premium feature on all indexed annuities. Or perhaps a 95% return of premium feature which would limit losses. In any case, the downside can be addressed easily by the current regulatory structure.
Finally you state that BD oversight is necessary to enforce suitability. Once again a simple rule can be applied limiting the amount of savings that can be allocated to an indexed annuity contract. Perhaps 75% of savings. Ironically, no such limitations apply to managed securities accounts that can effectively duplicate the performance of an indexed annuity. Furthermore, whatever restrictions the SEC applies to the indexed annuity, shouldn't the same restrictions apply to assets which can lose 100% of their value? Where is the suitability rules when it comes to securities that can lose 30% of their value overnight?
Show me the money and I'll show you many entities trying to get it. Is it really the lofty standards of suitability at stake or are we really talking about who will control the domain of indexed annuities and who will benefit from their control? Ironic that an asset that, for the most part, provides principal protection is under assault whereby assets that can lose 100% of their value (Enron, WorldCom, etc) are deemed suitable for the public.
Edwin Lichtig, MBA
(800) 888-3638