Insurance agents can sell certain annuity products as the DOL studies the Best Interest Contract Exemption rule.The Department Labor’s delay of a controversial portion of the new fiduciary rule should reignite sales of fixed indexed and variable annuities, according to industry trade group LIMRA. With implementation of the Best Interest Contract Exemption (BICE) clause postponed until July 1st, 2019, LIMRA now expects fixed indexed annuity (FIA) and variable annuity (VA) sales to rise significantly.
LIMRA had previously predicted a slump for annuities sales next year if the rule went into effect. If made into law, BICE would require advisors and agents selling VAs and FIAs to act in the best interests of their clients and disclose more detailed information about their compensation and any possible conflicts of interest. Critics of the provision have argued that the mandate could give rise to class action lawsuits.
VA and FIA advocates prefer that those products remain under the Prohibited Transaction Exemption (PTE) 84-24 rule, which permits insurance agents, brokers, and other specialists, to receive commissions for certain financial transactions.
A Window of Opportunity
With the BICE provision now on hold, LIMRA reversed its 2018 projections for all annuity sales from a 5% decline to a 5% upturn. Total fixed annuity sales are projected to grow between 5% and 10%, up from LIMRA’s springtime outlook that estimated a drop of 5%.
Within the fixed annuity sector, FIAs have an even brighter prognosis, with sales climbing 5% to 10%. LIMRA previously estimated a 15% to 20% decline in FIA sales. Todd Giesing, Annuity Research Director for LIMRA, called the delay “great news for some of the fixed annuity carriers out there.” Because of the window of opportunity created by the DOL postponement, LIMRA predicts that FIA sales could exceed $60 billion next year.
Meanwhile, VA sales are set to remain on a downward track in 2018, but the dip isn’t expected to be as pronounced as previously anticipated. Instead of a 10% to 15% downturn, LIMRA now forecasts a less steep drop of 5% in VA sales.
Giesing told Insurance News Net that new VA sales had slumped even before the DOL began discussions about the fiduciary rule, as providers sought to balance the risk profile within their portfolios between contracts sold with and without guaranteed living benefits. Giesing added that VA sales slid by 21% to $104.7 billion between 2015 and 2016, while 2018 VA sales could fall under $100 billion for the first time since 1998.
Delaying implementation of BICE allows independent marketing organizations (IMOs) to continue distributing indexed annuities to independent insurance agents who then sell the products to their clients. If BICE becomes law, only financial institutions such as banks, broker-dealers, insurers, and registered investment advisors (RIAs) could conduct FIA and VA sales, since those entities meet annuity contract premium thresholds — a standard most IMOs do not. “There was a break in the supply chain,” Giesing told Investment News. “We assumed IMOs would find their niche, but it would take time.”
Agents Can Still Sell Certain Types of Annuities
Until the DOL implements the BICE, insurance agents are free to sell certain annuity products without any new restrictions as long as they have the proper licenses. The postponement also gives the Trump administration time to study the rules and possibly propose other changes such as eliminating the class action provision in BICE.
Whether the administration decides to enact BICE or keep the exemption in place indefinitely, insurance agents selling complex financial products like annuities should always ensure the client’s interests take precedence. Agents must be honest and transparent in their dealings with clients, even if the sale doesn’t strictly fall under the fiduciary law.