As insurance products become more complex, the industry needs to redouble its efforts to fully disclose their risks, a federal regulator said today.
Norm Champ, director of the Division of Investment Management at the Securities and Exchange Commission, told an Insured Retirement Institute conference in Washington that the agency has been noticing a rise in the number of annuities that are linked to indexes and function like structured notes.
These instruments also can be subject to withdrawal caps, whose rules may confound customers. Mr. Champ pointed to a case the SEC recently brought against Massachusetts Mutual Life Insurance Co. for failing to disclose that once investors reach a “cap” on a certain kind of variable annuity, withdrawals can deplete principal. The company removed the cap from the product and paid a $1.625 million penalty last November.
“Your investors' retirement income should not be put at risk because of the complexity of their contracts that are not adequately disclosed,” Mr. Champ said.
The SEC wants to see plain-English disclosure on potential investment losses and gains associated with products, as well as the risk of principal loss based on early withdrawals. The agency even has asked insurers to change the names of some new products because they made the offering sound risk-free.
The Division of Investment Management has made a so-called summary prospectus for variable annuities one of its priorities, according to Mr. Champ. That document, which would be subject to the rule-making process, would be modeled after the mutual fund summary prospectus that was approved in 2009.
Separately, staff members at the SEC are taking notice of insurers that are going to extreme measures to curb their variable annuity exposure.
Attempts to limit additions to existing VA contracts and other changes enacted long after clients bought their products are becoming de rigueur for life insurance companies that want to stem VA inflows.
The development is starting to raise eyebrows among regulators.
“One issue that's been in the press is the suspension or limiting of subsequent payments,” said Michael Kosoff, branch chief at the SEC's Office of Insurance Products at the division.
Mr. Kosoff was also speaking at the IRI conference.
SEC staff members have been asking carriers about the number of contracts subject to such changes, as well as the insurers' legal basis for imposing such limits.
“We're still very interested in this,” Mr. Kosoff said. “The concern is whether you are changing the deal on the investor. If someone bought their product 10 or 15 years ago, they received a prospectus that detailed their rights.”
Though variable annuity prospectuses can disclose that a company has the right to limit future payments, carriers can be vague when they make the initial disclosure.
“You see a moving target where the original prospectus might have had a disclosure that says the company reserves the right to limit purchase payments,” said William J. Kotapish, assistant director of the Office of Insurance Products. “It might've been worded in a way that suggested they could reject something that was not in good order.”
A subsequent amendment years down the road that limits additions to a contract “frustrates the reasonable expectations of the investor,” Mr. Kotapish said.