Insurance carriers that offer fixed indexed annuities (FIAs) remaintight-lipped as to how they intend to market the products after theDepartment of Labor’s fiduciary rule is implemented, according toone annuity industry analyst.

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Related: Court denies NAFA in DOL fiduciary rulecase

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“This is the biggest game of chicken we are ever going to see inthe insurance market,” said Sheryl Moore, president and CEO ofWink, Inc., a Des Moines-based provider of analytics tools to theinsurance industry.

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“Carriers are not showing their cards,” said Moore. “They’re allwaiting to see what the others will do.”

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The fiduciary rule is expected to massively disrupt how FIAs aremarketed to retirement savers. About 60 percent of the roughly $50billion annual FIA market is sold through independent insuranceagents who contract with independent marketing organizations (IMOs)and field marketing organizations, which in turn contract withinsurance carriers.

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Fixed indexed annuities and all otherretirement investments sold on commission to IRAs will have tocomply with the Best Interest Contract Exemption, which regulatorscrafted to protect investors from receiving conflicted investmentadvice.

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The DOL created four classifications of financial institutionsthat can sell FIAs under the BIC Exemption: broker-dealers, banks,insurance companies, and registered investment advisories. Aprovision in the rule allows for independent marketingorganizations to apply for a financial institution exemption, whichwould allow them to market FIAs under the BIC Exemption.

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Last month, Moore published a blogpost confirming that the DOL is crafting a class-wide exemptionfor IMOs, citing sources in the Labor Department.

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The chances of the exemption being released before the rule’sfirst implementation date next April 10 is strong, Moore toldBenefitsPro, though her contacts at Labor have not confirmed arelease date.

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Will IMOs survive?

But even with the exemption, most IMOs will struggle to survive,she says, raising the question of whether insurance carriers willcontinue to sell FIAs through marketing organizations andindependent insurance agents.

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“Ultimately, I think the fiduciary rule has the power to whittledown the number of IMOs from 350 to 12,” said Moore. Compliancecosts will be too much for smaller IMOs to absorb, sheexplained.

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And the class-wide exemption the DOL is planning to issue doesnot mean all IMOs will automatically qualify as a financialinstitution.

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That’s because the exemption will require IMOs to hold cashreserves in order to guarantee they can make investors whole ifthey sue for breaching the BIC Exemption.

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Exactly what those reserve requirements will be, or how theLabor Department will calculate them, is unknown, and somethingregulators are struggling to assess, says Chip Anderson, executivedirector of the National Association of Fixed Annuities, whichrepresents insurance carriers, IMOs, and independent agents.

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“At this point, NAFA has no idea how the DOL will set theguidelines for capital requirements,” said Anderson in aninterview.

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“I think the DOL has a big challenge in understanding thismassive distribution system and coming up with reserve requirementsthat everyone will be comfortable with,” added Anderson.

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NAFA is appealing its lawsuit against the DOL rule in theDistrict of Columbia Circuit, and has filed for an emergency motionto have the fiduciary rule’s implementation date delayed by as muchas two years.

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In the emergency motion, attorneys for NAFA argue that the LaborDepartment’s delay in issuing its exemption for IMOs will make itimpossible for the organizations to comply with the rule by nextApril. In November, the lower court in the D.C. circuit upheld thefiduciary rule.

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A lawsuit brought in Kansas federal court by Market Synergies, aTopeka, Kansas-based independent marketing organization, raisedclaims similar to NAFA’s. The Kansas court also ruled to uphold thefiduciary rule. Requests for comment from Market Synergies were notreturned. Two other lawsuits against the rule are pending in Texasand Minnesota federal courts.

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Beyond the challenge of establishing guidelines for reserverequirements, Anderson says it is also unclear which regulatoryagency will oversee the capital requirements going forward.

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The Labor Department, like all other federal agencies, haslimited resources, which can be expected to be spent onimplementing the rule, facilitating industry’s compliance, andultimately, enforcing the rule.

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The task of overseeing reserve requirements may fall to stateinsurance regulators, but Anderson said that prospect raises itsown uncertainty. “Will the states want to take responsibility foroverseeing a federal law? I think there is a real conflict there.States don’t have authority over federal law.”

Regulators lacked understanding of IMO role in market

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Moore, who was sourced by regulators and attorneys at Laborduring the rulemaking process, says the agency lacked a goodunderstanding of FIA distribution channels even as it promulgatedthe fiduciary rule.

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She also said she believes regulators have been genuine inaddressing the concerns of IMOs and other annuity advocates.

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Nonetheless, she worries that the rule will adversely impact theindependent agent channel. Moore expects FIA sales to be down by asmuch as 20 percent next year.

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“The reality is that independent agents have driven competitionin the annuity market,” said Moore. “Without that drive we aregoing to see the cost of products increase. From that standpoint Iam disappointed. I’ve always seen the independent agent as valuablefor the market and for investors.”

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.