July 8, 2008
The proposal to regulate fixed indexed annuities and insurance policies as "securities" is based largely on news accounts comprised of air and hair-spray.
The state insurance commissioners presently regulate the insurance company vendors and their agent licensees the companies must stand up to rigorous and frequent examination by the states not all states allow the sales of these products and federalizing this industry will not accomplish anything. All sales materials are approved in advance by the state in which they will be sold, and many times they are "state specific" such as with indexed bonus annuities sold in Texas the literature there is different than California on the very same product.
Will making these products "securities" stop abusive sales?
No, any more than it has stopped abusive sales of variable products that are regulated by the SEC.
What consumer, anywhere in the 50 states, has lost one dime (not counting early surrender charges) because of having bought a fixed indexed annuity?
What consumer on the other hand HAS sustained a loss of principal and accrued interest by virtue of purchasing a security such as a variable annuity or variable life product? These products are specifically sold as not being guaranteed, whereas the claims paying ability of the vendor insurance company of fixed indexed products guarantees repayment, as does most state recovery funds.
Variable securities products are specifically not covered by any state guarantee fund.
Why take that safety net away from consumers?
Why also saddle the consumer with expensive costs and fees as is done with variable products, when they pay no fees or costs to purchase and hold fixed products?
All of the fixed indexed literature clearly says the consumer is "not investing in the stock market" thus your capital is not at risk the market performance dictates the rate of return on fixed indexed annuities and life products, not some insurance company board of directors.
More to the point: market goes up, interest is credited market goes down, you may not make anything that year but you will not lose any principal nor accrued interest.
That is NOT the case with SEC regulated variable products.
Some stock brokers refuse to sell fixed, indexed products. I have a client who went to a stock broker whose company "didn't believe in selling" fixed products, that was sold a variable annuity which lost 40% of its principal value in 3 years.
The broker's explanation was "oh well" and look at the fine print where it doesn't say the product is guaranteed against loss.
Thus, a well established, financially sound insurance company could sell a consumer a variable, SEC registered, SEC licensed product and they could lose their shirt with everyone's best wishes.
Yet the fixed products do not allow for such loss.
Can you point to a single instance of a purchaser of a fixed, indexed annuity that lost one dime of principal when the contract was held to maturity?
The "horror stories" about 80 year olds getting sold 30 year annuities just don't stand up to scrutiny. First, they have 30 days or more to cancel out, and secondly, I know of NO insurance company that wouldn't refund the full premium without penalty if such an abusive sale was brought to their attention, nor do I know of any insurance commissioner that would NOT take regulatory action against a life insurance agent selling such a product to such an individual.
There are sufficient regulations in place now with the various states' insurance commissioners having control over the industry which, by and large, is problem free.
Please don't get scared into enacting this proposed rule into law by the stock brokers that hate fixed, indexed products and their pocket-change fees compared to the high fees SEC licensees can charge.
You will choke the breath out of a viable consumer friendly product if this regulation passes.
Since there is a woefully insufficient factual basis to do so, fixed, indexed products should continue to be left to the states to regulate.