The sale of fixed indexed annuities through independent insurance agents, by far the largest source of FIA distribution, is likely to take a hard hit as a result of the Labor Department's fiduciary rule, and some believe insurers may lean more on other channels such as broker-dealers and banks in this eventuality.
Executives of major fixed-indexed-annuity product manufacturers have expressed in recent days how the regulation, which raises investment advice standards for retirement accounts, exposes insurers to more liability when distributing through independent agents as compared to broker-dealers and banks.
“There are numerous obstacles in the Best Interest Contract Exemption for our independent agent distribution channel,” John Matovina, chief executive of American Equity Investment Life Holding, the No. 2 seller of indexed annuities in 2015, said during the company's first-quarter earnings call. “And in our view, the BICE was not drafted to be workable for independent agent distribution of fixed indexed annuities.”
The BICE is a component of the Department of Labor's fiduciary rule that exposes affected parties to greater compliance and litigation risk. The DOL released the final version of its rule April 6.
“Thinking in terms of [the] broker-dealer channel, our view there is, there is a smaller threat to the sale of fixed indexed annuities,” Mr. Matovina said.
Craig Lindner, co-chief executive of American Financial Group Inc., and Alain Karaoglan, chief executive of retirement and investment solutions at Voya Financial Inc., expressed similar opinions during their respective firms' first-quarter earnings calls. Great American Insurance Group, a subsidiary of American Financial, was the No. 3 seller of FIAs in 2015, and Voya was among the top 15.
“We have by far the greatest impact as it's written today on the IMOs [independent marketing organizations] that have life-only agents,” Mr. Lindner said. “I think there is going to be an adjustment period for banks, for broker-dealers, for registered investment advisers, but I think they're going to figure out how to deal with the new regs. So I think the impact is going to be significantly lower.”
The issue is that the BICE, as it's currently written, doesn't quite work for distribution of fixed indexed annuities through independent insurance agents, according to Steven Schwartz, an insurance analyst at Raymond James & Associates.
That will have a significant impact on distribution because independent marketing organizations — also known as field marketing organizations, which market insurance products to independent agents — “are still the major distribution channel for these products,” he said.
Around six in 10 indexed annuities sold in the fourth quarter of 2015 were via independent agents, with the majority of that percentage via qualified retirement accounts, according to Wink Inc., a market research firm that tracks fixed indexed annuity data.
The BICE allows for the sale of products on a commission basis if certain parameters are met, one of which is the financial institution and investor enter into a contract saying advice is in the investor's best interest. While the DOL's definition of “financial institution” includes such institutions as banks, insurance companies and broker-dealers, independent marketing organizations do not qualify.
That means insurance companies, not the IMO, would have to sign the contract with a policyholder, and therefore be legally liable under the BICE for a recommendation made by an independent agent.
While broker-dealers have the ability to determine if their representatives sell a product in the best interest of the client, and prohibit a sale that's deemed not to be in the best interest, insurance companies can't monitor independent agents in the same manner to deem if a specific annuity is ultimately in a client's best interest, Mr. Schwartz said.
“How in the world, if I'm the insurance company, can I protect myself from legal liability? I can't,” Mr. Schwartz said.
Mr. Matovina of American Equity underscored the severity of the distribution conundrum.
“We see the obligations for oversight of agents there perhaps creating legal exposure that we're very likely not interested in,” he said.
One potential effect is an attempt to grow distribution through banks and broker-dealers, Mr. Schwartz said. Banks represented nearly 17% of sales in the fourth quarter last year, and independent broker-dealers had a 13.5% share, according to Wink.
Sales through those channels have been up even prior to the DOL rule — banks saw a 30% year-on-year increase in 2015, and independent B-Ds had 6% growth, according to Limra, an insurance trade group. These channels have historically favored variable annuities, but have warmed to FIAs in the last few years.
The DOL hasn't made it impossible for IMOs to enter into a best-interest contract, either — they must submit an application to the DOL for an individual exemption. IMOs could also opt to establish a broker-dealer or RIA, and thereby fall under the definition of a “financial institution” for purposes of the BICE. Indeed, that's something large IMOs have already, Mr. Schwartz said.