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The Final DOL Move Shocked the Indexed Annuity Industry

We’ve been anticipating the finalized DOL fiduciary rule for months now and it has finally been revealed. The Department of Labor’s final ruling was released yesterday and it contained some surprises for the fixed indexed annuity industry in particular. This information comes from the Investment News article, “Variable and fixed-indexed annuities feel sting of DOL fiduciary rule,” by Greg Iacurci. The proposed rule actually benefited fixed indexed annuities, but the final rule really increased the complexity of their regulations. When it comes to variable annuity products, the final rule was pretty much as expected based on the forecasts with a little extra leeway. Experts thought that variable annuity sales would take a hit after the final ruling and that new types of products would be likely to emerge. Variable annuities will be impacted by the rule just as expected and maybe even a little bit better than expected.

Many insurance companies were planning to use fixed indexed annuities to make up for the losses they anticipated in the variable annuity category after the DOL ruling. But now that indexed annuity products have been hit hard with these regulations, some insurers are scrambling to find a back up plan. Both variable and fixed indexed annuities are now subject to the BICE (Best Interest Contract Exemption) guidelines. They are no longer exempt from their commissions being challenged, something that could potentially subject them to compliance concerns and the risk of litigation. Experts were expecting many carriers to switch over from variable annuities to fixed indexed annuities because of their similarities, but many were stunned when indexed annuity products were included under the BICE requirements. MetLife and MassMutual had recently entered into a contract to develop a fixed indexed annuity for distribution. Neither company has proprietary fixed indexed annuities currently, so we’ll have to wait and see where this relationship goes after the DOL ruling.

Traditional fixed rate annuities will not be subject to any further regulation and are still subject to the Prohibited Transaction Exemption 84-24 rule. The DOL took variable and indexed annuities out of this 84-24 rule and put them under the BICE rule because they believe that these annuities are more complex and there are conflicts of interest when the products are sold. Insurers will now have to follow more stringent guidelines when selling these types of commission-based annuities, something that the DOL insists will benefit consumers.

It seems as though indexed annuities were the big surprise with this final ruling. Their sales have been on fire the past few years, with record highs hit in 2015. Indexed annuity sales will probably decline as a direct effect of these new BICE standards. American Equity’s stock was down 15% yesterday after the announcement. Ninety-five percent of their earnings come from fixed indexed annuities. The IRI’s Cathy Weatherford said that her organization was not surprised that indexed annuities were included in the BICE guidelines. She also pointed out that the BICE requirements are not as harsh in the final rule as they were in the proposed rule. The vice president of Moody’s said that she doesn’t expect variable annuity sales to suffer as much as they originally forecasted.

One thing remains the same. We are probably going to see more product development in fee-based annuities. BICE guidelines only apply to commission based-annuities, so fee-based annuity products make it simpler to follow the DOL guidelines. Insurance companies have already been working on fee-based variable annuities, now they will have to start on the innovation of indexed annuity products as well. The long anticipated finalized DOL fiduciary rule took a surprise turn against fixed indexed annuity products and less of a hit on variable annuities than expected.

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