NEW YORK - Life insurers that use field marketing organizations to distribute equity index annuities eventually may follow the industry leader and start dealing directly with more broker-dealers, according to industry observers.
However, most insurers - at least for now - are sticking with their in-place FMO arrangements, and the strategy of cutting out the middleman is a sensitive topic, they say, in light of the actions of Allianz Life Insurance Company of North America, which has a one-third EIA market share.
Starting Nov. 6, the Minneapolis-based insurer will permit broker-dealers with at least 1,000 registered representatives to bypass the FMOs and deal directly with company-employed wholesalers (InvestmentNews, Oct. 9).
Staying the course
"Although I respect their No. 1 position in index sales, we would not necessarily consider Allianz as a driving force of our strategy," said John Deremo, senior vice president of institutional distribution for Protective Life Insurance Co. in Birmingham, Ala.
He added that Protective distributes about 90% of its EIAs through FMOs and about 10% directly, and will continue that arrangement for the foreseeable future.
Large broker-dealers such as Raymond James Financial Inc. in St. Petersburg, Fla., already are supported by the company's wholesalers, Mr. Deremo said.
"We have a long and deep distribution relationship with Raymond James, which wanted a direct relationship," he said.
Industrywide, opinions are "mixed" regarding which strategy is best, he said.
"We have decided that we won't deal directly with the broker-
dealers at this time," said Sean O'Brien, vice president of distribution for Aviva Life Insurance Co. in Quincy, Mass. "We still believe firmly in the value of having a marketing organization involved in the sale due to their expertise."
Industry observers mentioned ING U.S. Financial Services in Atlanta, Life Insurance Company of the Southwest in Dallas, and RBC Financial Group and Sun Life Financial Inc., both of Toronto, as companies that might be affected by Allianz's decision.
These companies either refused to comment due to the "sensitivity and controversy" regarding the subject matter, as one company spokesman put it, or did not return calls requesting comment.
"Competing [EIA] providers are faced with monumental decisions in terms of how they deal with FMOs," said David Macchia, chief executive of Wealth2k Inc., a Hingham, Mass., strategic-marketing firm for annuities. Those insurers may strengthen their ties with the FMOs or they may follow along with Allianz, he added.
"Jackson National [Life Insurance Co. in Lansing, Mich.] already goes direct to the broker-dealers," Mr. Macchia said. "They are positioned beautifully, in my judgment."
"We've never wholesaled through FMOs, because EIAs are complex products that require one-on-one relationships and adviser training," said Clifford Jack, executive vice president and chief distribution officer for Jackson, who works in the company's Denver office.
"It's difficult to educate through an intermediary," Mr. Jack said. "The FMO wholesaling model doesn't allow the insurer to control the message and marketing materials." The only advantage of going the FMO route is that it permits the insurer to increase annuity sales volume quickly without having to build or increase a distribution force, Mr. Jack noted.
Approval lists coveted
Some industry observers think that most EIA insurers won't change their FMO relationships. They say that the impetus for Allianz's decision was its desire to obtain broker-dealers' stamp of approval so reps could sell its annuities.
"Allianz was at a disadvantage, because they were not on even one broker-dealer-approved list for EIAs," said Sheryl Moore, chief executive of Advantage Group Associates Inc. in Des Moines, Iowa, which operates the AnnuitySpecs .com website.
In August 2005, NASD issued guidelines stating that broker-dealers should supervise EIA sales by their reps, resulting in many firms' developing "approved lists" of insurers whose products they had vetted.
Insurers that have not had problems with broker-dealer approvals have less incentive for tweaking their FMO relationships, observers noted.
The approval lists haven't been an issue for Protective, Mr. Deremo said. However, he added, EIA oversight by Washington-based NASD will continue to influence distribution decisions until there is a final decision about whether EIAs are insurance or securities, and how they will be regulated.