TAKING SIDES: Insurers need to clean up variable annuity sale abuses

There’s an old adage in the insurance industry: Products are sold, not bought.

That’s always been the case with variable annuities, a market in which it seems that almost anything goes to make a sale.

All that may finally change, however. The Securities and Exchange Commission and the regulatory arm of the National Association of Securities Dealers are expanding their crackdown on abusive sales practices to insurance companies as well as broker-dealers.

InvestmentNews reporter Sara Hansard got wind of the stepped-up effort while attending a recent conference on life insurance products in Washington and broke the news in last week’s issue.

Patently inappropriate

Barry Goldsmith, executive vice president of enforcement for NASD Regulation in Washington, said notice had gone out to “several” brokerage houses, warning them that the agency is likely to file charges against as many as 30 companies in the next few months.

The move is long overdue. NASD Regulation has filed charges in only a few instances even though some companies have been engaging in patently inappropriate practices, such as selling variable annuities to people with tax-deferred retirement accounts.

“The sales force, for whatever reason, isn’t getting it in terms of what the drawbacks or negatives of these products are and explaining those to the customers,” says Mr. Goldsmith.

Paul Roye, director of the SEC’s division of investment management, which regulates insurance companies that sell variable investments, told the group that his division is focusing on the suitability of sales of “bonus” products, which offer investors immediate credits of a percentage of purchase payments.

The SEC, he said, is eyeing efforts by broker sales reps and insurance companies to convince customers to drop older products and switch to new ones, which often involves hefty fees and charges.

The question the SEC seems to be concerned with is who exactly is driving the marketing effort – the broker-dealer, the sales rep or the insurance company? In other words, where does the buck stop? We think it goes right to the top.

So far, Ms. Hansard notes, insurance companies have not been held responsible for inappropriate sales of their products.

But the SEC’s desire to get them more involved in policing the industry is a good move, even if it means that some companies could be facing charges. Companies need to take control of the way their products are sold.

shabby image

Selling insurance should be no different than selling new cars. Automakers issue extensive guidelines to dealers about everything from showroom sizes to how cars are displayed and promoted. Dealers who violate the guidelines are in danger of losing their franchise. Why can’t insurance companies do the same thing?

At the recent annual conference of the National Association of Variable Annuities in Atlanta, most of the agenda was focused on how to bolster sales in an essentially flat market.

Sorely lacking was a session on sales ethics, which should be held every year, not just periodically.

The insurance industry clearly needs to step up and take responsibility for the way its products are sold. But it looks as though it will take a few high-profile prosecutions to get that message across.

If the industry wants to boost sales, why not start by cleaning up its image? For too long, this business has been stereotyped by images of salesmen with bad haircuts, cheap suits and sketchy products. Most salesmen have learned how to dress. Now, how about their other shabby habits?