DOL fiduciary rule pushes indexed annuity carriers to develop new products

Insurance companies, especially those that are indexed-annuity-centric, have been launching annuity products within the past several months in anticipation of the Department of Labor’s fiduciary rule, which is expected to cause a big disruption to distribution of their traditional products.

Half a dozen companies, such as American Equity Investment Life Insurance Co. and Midland National Life Insurance Co., have debuted fixed-rate deferred annuities available with income riders since the start of the year.

That’s new to the industry — insurers have traditionally only offered these income riders, which provide a lifetime income stream, for variable and indexed annuities.

But, come January, when the rule fully comes into force, it’s going to become more difficult to sell variable and indexed products, especially for independent insurance agents. That has led insurers to develop a workaround for distributors to continue selling income guarantees.

National Western Life Insurance Co., North American Co. for Life and Health Insurance, and National Life Group are also members of the group to have launched fixed-rate products with income riders since the beginning of 2017, according to Limra, an insurance industry group.

American International Group launched one late in 2016.

This product development is a result of the fiduciary rule, and has primarily occurred among “indexed-centric” companies, said Todd Giesing, assistant research director at the Limra Secure Retirement Institute.

“We haven’t seen any of the larger variable-annuity carriers jump into this arena yet,” with the exception of AIG, he added.

Three firms — New York Life Insurance Co., Pacific Life Insurance Co., and Fidelity & Guaranty Life Insurance Co. — offered them prior, but that was “more of a niche distribution play,” Mr. Giesing said.

In addition to attaching income riders to fixed-rate annuities, development of fee-based indexed and variable annuity contracts, also a response to the DOL rule, has been another primary area of activity for insurers, observers said.

‘DISENFRANCHISED’

What makes distribution of indexed annuities so tough under the fiduciary rule?

It boils down to one particular provision in the rule, which will raise investment-advice standards in retirement accounts such as IRAs and 401(k)s when its phased implementation period begins June 9.

That provision is the best-interest contract exemption, which allows brokers and insurance agents to sell financial products for a commission under certain conditions, including the execution of a “best-interest contract” with investors allowing them to bring class-action lawsuits.

However, only certain parties — broker-dealers, registered investment advisers, insurance companies and banks — can qualify as the “financial institution” executing the contract with an investor.

That leaves independent insurance agents without a securities license in a tough spot. Independent agents typically distribute indexed annuities through independent marketing organizations, which can only qualify as a financial institution under certain standards that only a handful can seemingly fulfill.

Independent agents are by far the largest distribution channel for indexed annuities — roughly 57% of product sales came via independent agents in the first quarter this year, according to Wink, Inc., a market research firm.

And, because insurance companies are loath to serve as the financial institution, many non-securities registered agents wouldn’t be able to sell variable or indexed annuities, and by extension income guarantees, absent an alternative product.

“I see it mostly as a way to serve and continue to provide a product to that big independent agent group that has been sort of disenfranchised,” Carolyn Johnson, CEO of annuities and individual life at Voya Financial, said of the recent product-development trend.

Fixed-rate deferred annuities can be sold under a different provision — Prohibited Transaction Exemption 84-24 — that doesn’t require a contract.

SIGNIFICANT SALES?

American Equity debuted its RateShield fixed-rate annuity, with an optional IncomeShield rider, in early March. John Matovina, the company’s CEO, said it would “give independent insurance agents products they can sell on the [PTE] 84-24 if necessary.”

However, if the fiduciary rule is amended, as it may be by the end of the year by the Trump administration, to remove indexed annuities from BICE, “we do not expect RateShield to garner significant sales,” Mr. Matovina said. Indexed annuities represented roughly 95% of American Equity’s total first-quarter annuity deposits.

Because the majority of variable-annuity sales come via broker-dealers, all of which qualify as a financial institution, VA providers largely haven’t needed to develop similar products, Mr. Giesing said.