10/10 Limits IA Design

March 15, 2011

By Linda Koco
Contributing Editor, InsuranceNewsNet

March 15, 2010 --
Indexed annuities with 10-year surrender charges are becoming so prevalent that newly developed products are starting to look very similar, according to an indexed product researcher.

“It’s like cookie-cutter design,” says Sheryl J. Moore, president and CEO AnnuitySpecs.com, Pleasant Hill, Iowa.

For instance, many indexed annuities now set the first-year surrender charge at 10 percent and limit the street commission to 7 percent, she says. Most 10-year products also offer 5 percent premium bonuses.

Moore suggests the reason for the conformity is the annuity has to be attractive to three parties: the insurance company, the producer and the client.

“A 10-year surrender charge limits the spread to the insurer, the commission to the agent, and the potential gains/interest to the client,” she says. So, carriers are designing products for maximum value within those parameters. That leads to common features.

The numbers

Nearly 58 percent of index annuity sales involved products with 10-year surrender charges in fourth quarter 2010, according to new figures from AnnuitySpecs.com.

That’s up from 55 percent the same period last year, and up substantially from prior years. For instance, in 2005, the 10-year products represented only 24 percent of fourth quarter sales. The percentage has been rising steadily since then, to 32 percent in 2006; 43 percent in 2007 and 55-56 percent in 2008 and 2009.

The fact that more than half of indexed annuity sales now involve products having 10-year surrender charges may be of interest to indexed annuity critics. For years, such critics have complained that indexed annuities lock policyholders into contracts with surrender charge periods of up to 20 years.

Most industry sources counter that, even though some products did go out to 20 years in the past, that duration was not the norm. Today, no indexed annuities being sold go out 20 years.

In fact, the longest surrender period available today is 16 years, Moore says. “It’s offered on only one product, and the product represents less than 1 percent of sales.”

Sales of the longest duration products are relatively small. For instance, products with surrender charges of more than 14 years accounted for about 9 percent of fourth quarter 2010 sales, Moore says.

10/10 Rule

Moore believes the growth of 10-year product sales reflects the continuing impact of the 10/10 rule.

This “desk-drawer” rule, initially adopted by a few state insurance divisions, is now in effect in more than 25 percent of the states, she says. Though state variations do exist, the rule generally limits annuity surrender charges to 10 years and to 10 percent during the first year of the annuity (and declining thereafter).

Regulators use the rule in evaluating product approvals. That is spurring annuity companies to cut back on offering index annuities with surrender charges longer than 10 years.

Another spur has come from the broker-dealer community. B/Ds require that annuities sold through their firms be “10/10 friendly,” Moore says.

This requirement took hold after the Financial Industry Regulatory Authority (FINRA) — then called the NASD — issued its controversial Notice 05-50 in 2005. The Notice requires member B/Ds to treat indexed annuities as securities. The B/Ds soon started using the 10/10 rule as part of their product selection guidelines.

The other trend

As 10-year product sales have increased, sales of longer duration products — having surrender charges of 11 years and up — have declined significantly.

For example, in fourth quarter 2005, the longer duration products represented a 50 percent share of sales. By 2010, the same-quarter sales of longer-duration products had dropped to a 25 percent share, according to AnnuitySpecs.com.

By comparison, sales of shorter duration products, with surrender charges of fewer than 10 years, have hovered in the 18 percent to 22 percent range for the past several years.

Taken together, these developments suggest that the growth in sales of 10-year products has been at the expense of sales of the longer duration annuities.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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