As last-minute Congressional negotiations on the financial reform bill seem to make Rule 151A a non-issue, the annuity industry has to pull back from this potentially explosive issue. Rule 151A was in the process of turning the industry against itself…but will independent producers be able to go back to business as usual?
Earlier this year, five of the life insurance industry's biggest players–AXA Equitable Life Insurance Company, Hartford Financial Services Group Inc., Massachusetts Mutual Life Insurance Company, MetLife Inc. and New York Life Insurance Company– approached various independent marketing organizations to recruit them to distribute the carriers' fixed life insurance products. It was a routine scouting expedition for new distributors. But it turned into something much bigger and much more divisive: an industry fight over Rule 151A.
Surrounded by controversy since its proposal by the Securities and Exchange Commission in 2008, Rule 151A would reclassify equity index annuities (EIAs)–sometimes referred to by the industry as fixed index annuities (FIAs)–as securities, thereby wresting their regulatory oversight away from state insurance agencies and putting it into the hands of the SEC. But more importantly, the rule would require producers to obtain securities licenses to sell the products. The rule stems from an effort to address complaints of predatory sales practices by agents selling EIAs to seniors, for whom they are not well suited. The rule is hotly contested by producers that claim the product has been tainted by a few bad apples and that SEC oversight means costly licensure and harsh penalties for failing to abide by securities regulations.
All that may be moot, however, as a recent amendment to the financial services reform bill in Congress looks likely to exempt the sale of EIAs from SEC oversight entirely (see "Sigh of Relief for EIA Sellers, p. 10). But for independent producers who saw 151A as a catastrophe in the making, it may not be so easy to do business with the five big carriers who supported the idea of SEC oversight.
Case in point: Blair C. O'Connor, president of Producers Choice, an IMO based in Sterling Heights, Michigan. Like many who sell EIAs, O'Connor opposes 151A, and he has joined a coalition of like-minded IMOs, agents and carriers that are working to stop 151A from ever being implemented.
As O'Connor recalls it, some pro-151A companies came to his office a few months ago and asked him to start distributing their universal and term life insurance products. This rankled O'Connor, who felt that the companies were trying to do life insurance business with him on one hand and trying to undermine his own EIA business on the other.
He says he told the company reps how he felt, but the reps just shrugged and said the pro-151A position was coming from another part of their distribution. This did not satisfy O'Connor, so in addition to supporting efforts to quash 151A, he is trying to spur EIA producers and IMOs to reconsider doing any business with pro-151A carriers at all.
Andy Unkefer, president of Unkefer & Associates Inc., a Glendale, Ariz. brokerage and annuity wholesaler, is among those who oppose 151A. He agrees with O'Connor that independent agents and IMOs should avoid doing business with insurance companies that support 151A.
"When you're independent, the best thing to do is to vote with your business," he says. That is, to give business to companies that support the independent business model.
The problem, says annuity expert Jack Marrion, president of St. Louis-based Advantage Compendium Ltd., is that most IMOs and agents know about the pro-151A position of five carriers, but they simply do not care about it. The pro-151A carriers mainly write variable policies, and by backing the rule, they are simply looking after their own interests. Moreover, most IMOs and EIA producers do not sell products of those companies and very few write life insurance, so the pro-151A carriers do not affect them on an everyday basis.
Marrion says most IMOs and agents lament this split in annuity carriers, but while there is strong opposition to 151A among independent IMOs and agents, producers differ over what, if anything, should be done about it. Some IMOs view the pro-151A position among carriers as irrelevant, and some even wonder if getting involved in the 151A fight even matters.
A non-issue?
"We expected [the pro-151A carriers] to take that position, because the majority of their business is securities," says Matt J. Rettick, chief executive officer of Covenant Reliance Producers, LLC, Nashville, Tenn.
But for independent agents, he says, it is a non-issue. The five companies are captive agent companies, or like captive companies, he says, so independent agents can't sell the companies' products anyway.
Further, "the companies' game is in the securities marketplace," Rettick says. "They don't sell much in the way of fixed products, and they don't sell indexed products…so we wouldn't want to sell for them anyway, since we are a true independent channel, and we represent a vast array of companies."
Agents should definitely focus on continuing "a strong offense" against 151A in Washington and the courts, Rettick stresses. But they should also "prepare for the worst" by, say, becoming a registered investment adviser or purchasing/creating their own broker-dealer–both of which he has already done.
Karlan Tucker, chief executive officer of Tucker Advisory Group, Littleton, Colo., also sees the position of the five companies as a non-issue.
The companies have huge variable annuity operations, Tucker says, "so they are trying to protect their own premium dollars by supporting 151A, especially since a lot of money has been flowing from VAs into FIAs." Some producers think the pro-151A companies will themselves start selling FIAs if the products are declared securities, he adds.
