A lawsuit that alleges Security Benefit Life Insurance Co. engaged in a fraudulent scheme related to its indexed annuities hints at trouble for other indexed annuity shops at a time when the products are growing more popular.
The lawsuit, Howard Rosen v. Security Benefit Life Insurance Co., targets the insurer's use of so-called proprietary indexes in two of its indexed annuity products starting around 2011.
The returns of traditional indexed annuities are based on well-known stock market indexes like the S&P 500. However, proprietary indexes are often built as an amalgamation of at least one market index like the S&P 500 plus other features like cash and often control for volatility. The result, according to critics, can be an
opaque index that confuses consumers.
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Proprietary, or hybrid, indexes have become much more popular over the past decade, largely as a marketing response to low interest rates.
Traditional indexed annuities have features that limit a consumer's returns — for example, if the S&P 500 returns 10% one year, an annuity with a 5% cap would only credit the consumer with a 5% gain. During the decade of rock-bottom interest rates after the financial crisis, those caps
came down, making them less attractive to consumers.
Because proprietary indexes have volatility control mechanisms built in, insurers can market them as "uncapped" products with unlimited potential for investment returns, which appears more attractive to consumers.
Plaintiffs in the Security Benefit lawsuit claim that the insurer's annuity products were "misleading and deceptive," and that its marketing around them was "false and misleading without a clear statement that the Synthetic Indices were in fact designed to have much lower returns than the stock indices traditionally used in [indexed annuities]."
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Michael Castino, a spokesman for Security Benefit, said the company believes it has "substantial defenses to the claims alleged" and plans to vigorously defend itself.
Indexed annuity sales have
ballooned over the past decade, jumping to $68.5 billion last year from $32 billion in 2010, according to market research firm Wink Inc. Over that time period, sales of indexed annuities using hybrid indices have increased substantially — to a 34% share of annual sales last year, from 0% in 2010.
More insurers have debuted products, as well. There are currently 93 unique hybrid indices, compared with three in 2010, according to Wink data.
Since most of the products are marketed similarly, the Security Benefit lawsuit could have negative implications for other indexed annuity providers.
"The way that product is marketed is not dissimilar from other indexed annuities with hybrid indices," said Sheryl Moore, president and CEO of consulting firm Moore Market Intelligence. "It will be interesting to see the outcome of this case and whether or not it will translate into additional class actions."
In the Security Benefit lawsuit, filed Oct. 16 in California district court, plaintiffs say the company "deceptively illustrated the performance" of the Morgan Stanley Dynamic Allocation Index Account and Annuity Linked TV Index as "capable of producing double-digit returns to the purchasers of a Secure Income or Total Value Annuity."
The company, plaintiffs allege, did so knowing the annuities wouldn't perform as represented given their structure, embedded costs, risks and product features.
In 2011, the year Security Benefit entered the indexed annuity market with its Secure Income Annuity, the company jumped to No. 1 in indexed annuity sales, according to the lawsuit. Its Total Value Annuity, launched the following year, subsequently replaced the Secure Income product as the market's No. 1 seller.
