A.M. Best Comments on Securities and Exchange Commission's Proposal to Regulate Indexed Annuities as Securities - MarketWatch
OLDWICK, N.J., Jul 11, 2008 (BUSINESS WIRE) -- At its open meeting on June 25, 2008, the Securities and Exchange Commission (SEC) outlined a proposed rule that would change the interpretation of the exclusion for annuities under the Securities Act of 1933 and require the registration of newly-issued indexed annuities as securities. The motivation for the new rule appears to be driven in part by ongoing concerns over abusive sales practices, as well as inadequate disclosure. Such a change would result in a clear mandate for the Financial Industry Regulatory Authority (FINRA) to supervise indexed annuities and those who sell them. Should this proposed rule change be formally adopted, the implication for some indexed annuity writers could be significant, as the lion's share of current indexed annuity sales are through independent marketing organizations (IMOs)--many of whom utilize agents who are not registered representatives.
As currently proposed, the final rule would take effect 12 months after publication in the Federal Register. Given the time necessary to collect and digest public comments, initial estimates suggest that the effective date of implementation is unlikely to be earlier than the beginning of calendar year 2010. Additionally, A.M. Best notes that both the timing and content of the final rule could be materially influenced by the lobbying and legal efforts of various industry constituents including industry organizations, independent marketing organizations, indexed annuity writers and insurance industry regulators.
At present, A.M. Best does not anticipate any immediate rating actions resulting directly from the SEC's proposed rule change. Given that the initial proposal would not impact business written prior to implementation, the near-term impact on the financial statements of indexed annuity writers is likely to be de minimus. Furthermore, even if it were ultimately to be implemented in its current form, companies currently writing significant amounts of indexed annuity business would have a substantial amount of lead time to prepare and reposition their business models. However, A.M. Best notes that since IMOs are the dominant form of distribution for indexed annuities industry-wide, it may not be practical or cost effective for indexed annuity writers to get enough of their agents registered in order to maintain sales at current levels.
Nevertheless, despite expectations that the SEC's proposal is unlikely to have a material impact on indexed annuity writers over the short- term, A.M. Best's longer-term view is more guarded--particularly for those companies heavily committed to this business. A.M. Best will continue to monitor the progress of the SEC's proposal, as well as the development of strategic initiatives by insurers with a heavy sales concentration in indexed annuities targeted at mitigating the impact of the potential rule change on new business.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.
