Complexity of new indexed annuities causing concern

Insurers are using 'hybrid' indices as a way to differentiate themselves, but critics contend the products are less transparent, more confusing and don't add financial benefit

Dec 14, 2017 @ 5:41 pm

By Greg Iacurci

The way indexed annuities have evolved has led to concern from some corners of the insurance market, with some critics saying insurers have developed increasingly complex products in hopes of standing out in a competitive market.

Indexed annuities are a type of fixed annuity that tracks a market index, such as the S&P 500. Some observers are wary of the surge in products using a "hybrid" market index, which asset managers often license to insurance companies.

Critics say such indices are less transparent and more difficult to understand than well-known alternatives such as the S&P 500. They also contend hybrids don't offer more of a financial benefit than a traditional market index.

Ronald Grensteiner, the president of American Equity Investment Life Insurance Co., among the top five sellers of indexed annuities, summed up concern on a recent company earnings call.

"We believe proprietary indices add another level of complexity to a safe money insurance product and do not offer a significant growth advantage," Mr. Grensteiner said.

By contrast, the S&P 500 is a "transparent public index with 60 years of history that a policyholder can easily track," he said.

SURGE IN INDICES

While there were only six hybrid indices available for use in indexed annuities in 2013, there are more than 50 today, according to Wink Inc., a market research firm. They are the second-most-popular index, only behind the S&P 500, representing more than 30% of sales in the third quarter, according to Wink data.

Newer examples include the Pimco Global Optima Index, which American International Group Inc. debuted last month; the S&P Multi-Asset Risk Control 5% Excess Return Index, used by Sammons Financial Group's North American Co. for Life and Health Insurance; and the BNP Paribas Momentum Multi Asset 5 Index, used by Ameritas Life Insurance Corp.

Hybrid indices have become more popular for insurers as indexed annuity sales have swelled in recent years and companies look for a competitive advantage.

"They're looking for a way to differentiate themselves and have the product not be a commodity," said Scott Stolz, senior vice president of Private Client Group investment products at Raymond James & Associates Inc. "If you bring out another S&P 500 indexed annuity, you have what everyone else has."

Hybrid indices provide insurers with other marketing messages, too. As opposed to some indexed annuities that cap the interest an insurer credits to a policy, hybrid indices are able to offer an "uncapped" interest rate to consumers. In reality, though, they have a built-in mechanism to control volatility and the amount of interest an insurer credits.

Indexed annuities are currently regulated as insurance rather than securities products. Independent insurance agents, by far the biggest distributors of indexed annuities, only need an insurance license to sell them. Roughly half are insurance-licensed-only.

However some observers feel hybrid indices are blurring the line between securities and insurance products.

Sheryl Moore, president and CEO of consulting firm Moore Market Intelligence, believes insurance agents who answer questions from clients about a hybrid index are potentially giving unregistered investment advice.

Doing so is a fairly serious offense, punishable through fees, loss of an insurance license and potentially jail time, depending on the state, she said.

"The product must not be marketed primarily as an investment, and that's what is subject to interpretation here," Ms. Moore said. "You're bringing up securities in your discussion of what the product is."

Of course, the same is true of other indices such as the S&P 500, but observers say that situation is unlikely to arise because of its broad visibility and acceptance by clients.

Jim Poolman, executive director of the Indexed Annuity Leadership Council, disagreed with Ms. Moore's assessment, saying insurance agents can explain any index without having a securities license. However, he acknowledged there is market concern with hybrid indices, generally.

"We know state regulators are concerned about that," said Mr. Poolman, former insurance commissioner in North Dakota. "Our folks have been for a regulatory high bar with this product, and understand if there is concern."

Several broker-dealers maintain a certain cautiousness toward some of the available products.

"It's really kind of a made-up index, where the client doesn't really know what the underlying holdings are," Jessica Rorar, investments planner at ValMark Financial Group, said of some of the proprietary indices.

ValMark only allows brokers to use hybrid indices whose underlying holdings are transparent, Ms. Rorar said. Of the four indexed-annuity providers on ValMark's platform, two of them offer proprietary indices.

Similarly, roughly 85% of Raymond James' indexed annuity sales come via products tied to the S&P 500, Mr. Stolz said. The brokerage requires hybrid indices to have a minimum track record in order to offer the product.

Mr. Poolman, though, was more sanguine.

"If state regulators are approving the products with the use of those indices, we assume they are comfortable with the information readily available to consumers, whether through the companies' website or other means," he said.

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