Regulators Need Indexed Product Training

2) New Jersey's Commissioner of Banking and Insurance, Steven Goldman, issued standards for carriers wishing to file indexed annuities for sale in New Jersey; these standards seem inequitable or incomplete.

Goldman carefully noted in his memo that "the participation rate should not be less than 30%." However, he then said that "if the contract has a cap rate, this rate, net of the threshold rate or margin [spread], should be greater than 0%." For anyone minimally familiar with indexed annuities, that second requirement is a head-scratcher. It means that if the indexed annuity has both a cap and a spread, the difference of the 2 must equal zero. However, what if the product does not have a cap? Alternatively, what if the product does not have a spread? Goldman has not specified a minimum cap or maximum spread for these products.

For this reason, ABC Insurance Company could file an indexed annuity in New Jersey with a minimum participation rate of 30% and no minimum cap. Or, it could file the same product with a minimum participation rate and no maximum spread. So, if the market gets bad, ABC Insurance could potentially lower its caps to 2% on one product and raise its spreads to 20% on another product.

3) Alex Sink, chief financial officer for the State of Florida Department of Financial Services, issued an alert characterizing indexed annuities as the bad guys of the annuity market.

She said "some annuities, and especially equity indexed annuities, include a feature known as a market value adjustment." That is misleading. MVAs are just as common in fixed annuities and even on the fixed buckets of variable annuities.

Furthermore, Sink provided a one-sized description of market value adjustment: These "typically function to alter or reduce the cash value of an annuity dependent on changes in the interest rate since the contract's issue." However, MVAs can result in a positive or a negative adjustment to the cash value and only when more than the penalty-free amount is withdrawn. Maybe Sink doesn't know that.

Sink employed scare tactics, too. When discussing what she calls "bonus gimmicks," for instance, she warned consumers to "beware of the promise of a 'bonus' used to entice you into investing in an equity indexed annuity." Her most damaging statement warned, "However, bonuses are often illusory, and are seldom paid up-front." But here is a reality check: As of November 2007, 37% of the 335 products on the indexed annuity market feature a bonus. Ten of them are two-tiered annuities that require annuitization to receive the bonus. Another 3 feature a bonus on the guaranteed lifetime withdrawal benefit value; to receive the bonus, the annuitant must take withdrawals for life. The remaining 111 policies feature up-front bonuses.

In sum, state regulators are wise to require ongoing training of annuity producers. This will help ensure that producers know the facts before they speak to the public. But, as the above examples demonstrate, state regulators need some training, too.