Company Preparing Agents for Indexed Annuity Regulatory Changes

 

Tuesday, Nov 24,2009, 10:43:21 AM   Click:

Although it's not yet clear whether equity-indexed annuities will be regulated as securities, the new chief of Aviva USA says his company is preparing its agents and distribution partners for potential changes on the horizon.

In private and industry conversations with the U.S. Securities and Exchange Commission, it expressed commitment to ensuring companies have time to prepare for SEC Rule 151 A, said Christopher Littlefield, chief executive officer of Aviva USA, a unit of Aviva plc of the United Kingdom. "We believe we are well in advance in getting our distribution partners ready for... that effective change."

In December 2008, the SEC voted to reclassify indexed annuities -- retirement-income products that are currently regulated at the state level as insurance -- as securities.

Indexed annuities would be treated as securities if amounts payable by the insurer are more likely to surpass amounts guaranteed under the contract. Effective Jan. 12, 2011, insurers would be required to file their products with the SEC and offer them via a prospectus. Agents would need to become registered representatives, meaning licensed to sell securities.

But a ruling in July by the U.S. Court of Appeals for the District of Columbia Circuit required the SEC to reconsider its ruling -- a partial victory for insurers, though maybe a momentary one. The court ruled "that the SEC failed to properly consider the effect of the rule upon efficiency, competition, and capital formation. Accordingly, we remand the rule for reconsideration" (BestWire, July 21, 2009).

However, the court didn't find that the SEC made a mistake in deciding indexed annuities should fall under the Securities Act of 1933.

The court believed the SEC hadn't done the appropriate due diligence to determine whether or not the regulation was necessary or "whether it might be redundant to what might already exist, and what we believe is an already effective state insurance regulatory regime," said Littlefield, who recently met with BestWeek U.S./Canada.

There "continues to be some back and forth" on 151 A, he said, adding that he doesn't think "anyone believes that 2011 is the appropriate effective date."

Littlefield was named to his post in September, where he leads the company's life insurance and indexed annuity business in the United States. Before being promoted to CEO, he served as chief operating officer since February 2008. 

He joined the Iowa-based life insurance company AmerUs Group in January 2006, as executive vice president - general counsel and secretary. In November of that year, Aviva plc completed its $2.9 billion acquisition of AmerUs.

Aviva USA has spent a lot of time preparing its distribution partners and employees for possible changes. Littlefield said he met with three of the five commissioners of the SEC to discuss how 151 A may not be needed or if it is, how the company "can ensure that our products compete on a level playing field with those of comparative products."

The company is making sure its producers will have a product to sell -- whether it's a registered product or a traditional fixed one, he said. It's also working with producers to understand what kind of licenses would be required, Littlefield said.

Generally, about 30% to 40% of its producers already are registered representatives and many of its large producers are registered representatives, he said. The company is committed to selling indexed annuities -- and committed to independent agents -- regardless of how they would be regulated.

With indexed annuities, an insurance company invests most of the principal in bonds to ensure the policy will generate a small annual return, but the insurer uses a small portion of the premium to buy options in a stock market index. Options that are exercised can result in additional interest credited to a policy, potentially more than an investor might achieve through other fixed-income investments.

Aviva USA believes these are insurance products that "are effectively governed by state insurance regulators," Littlefield said.

Customers have no risk of losing principal, he said. "There can be no loss of your investment," he said. "In fact, none of our customers have lost a penny as a result of equity market declines."

In the third quarter, Allianz Life Insurance Company of North America recaptured its position as the No. 1 seller of indexed annuities in the United States. Allianz Life, a unit of Germany's Allianz SE, recorded sales of nearly $1.4 billion and an 18.5% market share, according to AnnuitySpecs.com, a firm that tracks the data (BestWire, Nov. 17, 2009)

Aviva USA became top seller of indexed annuities in the first quarter of 2008, overtaking Allianz Life, the long-time sales leader. But Aviva dropped to fifth place in the third quarter, with sales of $670.5 million and an 8.8% market share, according to AnnuitySpecs.com.

Total industry sales rose to $7.5 billion, a gain of 11.3% from last year's third quarter.