Investing

Fiduciary Rule Drives Reconsideration of Fee-Based Annuities

Nearly half of insurers feel the DOL conflict of interest rule would positively impact sales of fee-based annuities, according to Cerulli Associates; less certain is how to effectively package and price such products. 

By John Manganaro editors@strategic-i.com | December 14, 2016
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U.S. variable annuity (VA) and fixed-index annuity (FIA) sales are expected to decline by at least 10% through 2018 as the industry struggles to adapt to upcoming fiduciary reform regulations put forth by the Department of Labor (DOL), according to data shared by Cerulli Associates.

There can be little doubt that annuity providers, many of them at least, would like to see the significant reforms halted or dialed back under the pending Trump administration. They argue they will never be able to make the new fiduciary standard's “best-interest contract exemption” or “BIC” provisions workable, given the commission-based distribution arrangements traditionally used for fixed-index annuities.

Annuity providers would much prefer to be allowed to use the distinct “84-24 exemption” to continue to use commission-based sales structures—which had been initially proposed by the DOL but subsequently reversed in the final version of the rulemaking published last year and slated to start taking effect in April 2017. Utilizing this exemption would still likely require some changes that are in the best interest of the end investors purchasing annuity products, but many insurers believe 84-24 is an easier compliance hurdle to jump over. 

Polling conducted in this evolving environment by Cerulli Associates suggests that insurers feel the biggest challenge they are facing for the foreseeable future is the DOL rule—even as concerns about lasting low rates and stagnant global economic growth add additional headwinds.

“Insurers' responses to new the regulatory landscape will significantly impact the future of VA and FIA sales,” argues Donnie Ethier, associate director at Cerulli. “In order to ensure future relevance, insurers must examine both the pricing and positioning of their products.”

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