Tuesday, June 26, 2012

SEC Official Warns Insurers about VA Benefit Exchanges

Nash says switch must be in best interests of contract holders
June 26, 2012 4:26 pm ET
An official with the Securities and Exchange Commission called upon life insurers to protect their legacy variable annuity clients — and to make sure that swapped benefits are suitable.
“When a company discontinues the sale of a contract, one option is to orphan the contract, allowing investments to dwindle,” said Susan Nash, associate director for disclosure and insurance product regulation at the SEC. “I urge you to focus on the long-term interests of your existing contract owners, as well as the reputation of your company.”
She spoke Tuesday morning at the Insured Retirement Institute's Government, Legal and Regulatory Conference.
Ms. Nash also commented on a new practice among life insurers with large books of legacy variable annuity business: the offer to clients to drop accumulated living or death benefits in exchange for an incentive, such as an increase in account value.
“In some cases, incentives may be offered to contract holders when they relinquish contracts that have living benefits,” Ms. Nash said. “These exchanges may raise questions of suitability.”
She added that “there is often an easily identified class of investors for whom the switch would not be advantageous,” namely those who could expect to use their living-benefit features.
“I encourage you to closely scrutinize these exchange transactions from the investors' viewpoint what exactly is being given up,” Ms. Nash said.
Ms. Nash also called for clear disclosure to clients and advisers on variable annuity contracts. Such disclosure should “provide information to contract purchaser that helps them make informed purchase decisions,” as well as “provide information to existing contract owners to help them understand how their investment has performed and changed,” she said.
The SEC is also boosting its staff, searching for an expert on derivatives to advise the department on “novel and complex investment products, including novel variable product designs,” Ms. Nash said.
The agency recently bolstered its expertise on exchange-traded funds in January when it brought in Barry Pershkow as senior special counsel in its investment management division.