Banks, brokers slow to embrace indexed annuities

Jun 27, 2005 @ 12:01 am

By Gary S. Mogel

NEW YORK - Banks are reluctant to sell indexed annuities, because of their complexity and uncertain regulatory future, observers say, and the wirehouses and broker-dealers spurn them because they don't want competition for the variable annuities they already sell.

"Indexed annuities are sometimes referred to as 'snowflake' products because no two are alike," said Timothy Pfeifer, Chicago-based principal with Milliman USA Inc. of Seattle. Forty new indexed-annuity products were introduced last year, adding dizzying variety to an already complex corner of the annuity market, he added.

"Even insurance companies that said they would never get into the indexed-annuity business introduced products," Mr. Pfeifer said.

Insurance agents or insurance brokers sold 84% of indexed annuities last year, according to the "Fixed Annuity Premium Study," released this month by Beacon Research Publications Inc. in Evanston, Ill.

"Banks are very risk averse and consider variable annuities to be at the top of the risk spectrum, fixed annuities at the bottom and indexed annuities somewhere in the middle," said Jeremy Alexander, chief executive of Beacon Research. He added that indexed annuities are considered by some banks to be too risky and not a good fit for their product mix.

'Anecdotal' inroads challenged

Mr. Alexander discounted claims by banks, wirehouses and broker-dealers that they are increasing their sales of indexed annuities as "anecdotal." He said: "Independent agents still sell the vast majority of indexed annuities, although this may change as other channels become more familiar with the product."

Mr. Pfeifer said he thinks that insurance agents' dominance over the other indexed-annuity distribution channels is as high as 95% of the market, with all other channels splitting the remainder.

Banks are reluctant to sell indexed annuities, because their platform personnel aren't trained to sell what the banks perceive as complex investment-related products, and their older and more conservative customers aren't seen as prime candidates for the products, observers say.

Also, independent agents are more focused on commission income than are bank reps, making indexed annuities, which average 9% in commissions, according to Mr. Pfeifer, very attractive to the agents.

Wirehouses and regional broker-dealers aren't put off by the products' complexity or commission structure, but they don't want to sell against themselves, he said. "Their stance is that a variable annuity with guarantees works as well as an equity-indexed annuity," Mr. Pfeifer added.

Scrutiny a worry

The banks are also concerned that regulators will treat indexed annuities as securities, subjecting them to scrutiny by Washington-based NASD and the Securities and Exchange Commission, he said.

Currently, indexed annuities aren't registered and aren't considered securities, but that may change, said Mark Mackey, chief executive of the National Association of Variable Annuities in Reston, Va.

Beginning in the second half of the year, banks will sell more indexed annuities as insurers start tailoring simpler products for the bank channel, Mr. Pfeifer predicted.

Another potential stumbling block holding back indexed-annuity sales at banks is that banks like to sell insurance products from well-known companies, and there aren't many household brand names in the indexed-annuity business, Mr. Alexander said.

"I think that the bank marketing channel will explode once the products are tailored for that channel," Mr. Mackey said.

The wirehouses and broker-dealers aren't moving as strongly into indexed annuities as the banks are, the experts agree. These channels are "comfortable" selling variable annuities, not as comfortable selling fixed annuities, and anything in between [including indexed annuities] "just doesn't excite them," Mr. Pfeifer said.

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