The Insured Retirement Institute, an annuity industry trade group, said recent business decisions Ohio National Financial Services Inc. has made around its variable annuities poses a risk to the broader annuity industry.
Ohio National stunned insurers and advisers in late September when the firm
announced it would be terminating the trail commissions advisers earn on some variable annuities. The firm
stopped paying these trails last week.
In October, the insurer — a former IRI member — announced it
would make a buyout offer for those annuities, which provides a financial incentive for clients to exit the policies. IRI said these business decisions pose a headwind to the annuity industry.
"Ohio National's buyout offer, and subsequent suspension of trail commissions, were the most notable examples of de-risking actions driving negative media coverage in 2018," IRI said in its annual State of the Insured Retirement Industry report. "Such moves may look good from an accounting and actuarial perspective, but they risk creating the perception of an industry reluctant to stand behind its products."
Advisers and insurance executives called Ohio National's decision to cut annuity trail compensation on some VAs — those sold with a guaranteed minimum income benefit rider — unprecedented.
Ohio National in mid-September, only weeks prior to its announcement about trails,
stopped underwriting new annuity policies.
Jessica Rorar, annuity planner at ValMark Financial Group, said the insurer's decision to exit the annuity market wasn't surprising because it didn't have a large market share relative to competitors. The firm was the No. 17 seller of variable annuities in 2017, according to Limra, an insurance industry group, and has $24 billion of VA assets on its books.
The "shocking" thing was the elimination of adviser commissions, Ms. Rorar said, which could ultimately cause some advisers to rethink using annuities with clients.
"That [decision] sent a ripple effect through our advisers, saying, 'Is this going to happen with other carriers we do business with?'" Ms. Rorar said. "From the adviser standpoint, they're thinking, 'Should I sell annuities anymore?'"
She thinks the uncertainty may cause some advisers to
choose an upfront rather than trailing annuity commission instead of avoiding annuities altogether.
Overall annuity sales of $203.5 billion last year were the lowest in 16 years, according to Limra. That was due
largely to the Department of Labor fiduciary rule, which placed more stringent sales requirements on brokers and advisers. IRI projects annuity sales will rebound this year to around $215 billion-$220 billion, and grow another 5%-10% in 2019.
Several insurers in addition to Ohio National, such as AXA Equitable Life Insurance Co.,
Transamerica Life Insurance Co.,
Voya Financial and The Hartford Financial Services Group Inc., have offered incentives to investors in recent years to try to get out of costly guarantees underwritten around the time of the financial crisis. (The Hartford and Voya recently sold off their legacy blocks of annuity business.)
Ohio National's decision around annuity compensation will likely serve as a catalyst for clients to take the buyout, advisers said.
"You've sort of cut out at the knees the only people who would've lobbied to keep those policies in force," said Scott Witt, a fee-only insurance adviser.
Lisa Doxsee, an Ohio National spokeswoman, said brokers' obligation to provide ongoing advice to customers isn't dependent on any contractual payments.
"Regardless of the arrangement with us, we believe advisers do and will continue to act in the best interest of their clients," Ms. Doxsee said in a statement.
Advisers argue that logic conflicts with reality — not all brokers, they said, will be willing to provide advice for no compensation. Several broker-dealers, most recently
UBS, have
sued Ohio National in a bid to restore the commission payments.
But not all advisers see Ohio National's decision as a major threat to the industry.
"I don't think it'll open the floodgates to the death of the annuity industry or anything," Mr. Witt said. "These are both cost-saving actions for Ohio National. That is how I would view it."
