Variable Annuity Regulation: Speech by Susan Nash

Last Tuesday, Susan Nash, Associate Director of the Division of Investment Management at the SEC, gave an interesting speech at the URI 2012 Government, Legal & Regulatory Conference regarding variable annuities. Variable annuities continue to grow in sales -- according to Ms. Nash's comments, sales of variable annuities grew by approximately 12% in 2011 -- but have been the subject of numerous FINRA Investor Alerts and Regulatory Notices due to their high costs and complex risks.

Ms. Nash commented on the changes that have taken place in the variable annuity market, especially reductions in investment choices and living benefits.

Each of these moving parts affects the performance of a variable contract, and together they may significantly reduce the benefit of the contract to the investor. For this reason, it is essential that offering materials clearly highlight the costs and limitations associated with living benefits, so that investors can make an informed decision.

She also discussed the "disparity in the servicing of older and newer contracts," whereby issuers would "orphan" older contracts by discontinuing features or investment options, or by encouraging the exchange of older contracts for newer ones. According to Nash, issuers often choose to represent new features as 'enhancements' to older contracts, and "the juxtaposition of new contract features with changed and sometimes discontinued features can make it extremely difficult for an investor - or a financial advisor - to identify the information that is relevant." The SEC is reportedly considering a new disclosure framework for variable annuities to improve the understandability of these contracts.

However, variable annuities are highly complex, and the variable annuity marketplace is highly innovative and responsive to change. Ms. Nash's comments suggest that even within such long-term investments as annuities, insurance companies can wield a significant amount of control over the ultimate value of the product to the investor. As many investors look for low-risk investments to guarantee their retirement savings, variable annuities may grow even more popular, and even more complex.