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The growth of the annuities market has been a boon for insurance companies accounting for more than half of their sales. According to the ACLI fact book:
The mix of premiums from life insurance and annuity considerations has changed markedly over the last 25 years. In 1978 the share of premium receipts from life policies (46%) was more than double the 21 percent from annuities. By 2002, this trend had reversed: Life policies accounted for only one-quarter of premium receipts (26%) while annuity considerations contributed more than half (53%)."1
But the growth of the annuities market has the potential to bring forth a set of problems and ethical scandals for the industry that could be as devastating as the scandals in the early 90s. There are challenges to the worth of annuities, serious challenges to some of the marketing techniques that are used, and, finally, concerns about the ability of companies to meet the demands of their guaranteed payouts.
Almost weekly there is a story in the New York Times or Wall Street Journal about supposed ethical misbehavior in selling annuities, usually variable annuities. Some of this misbehavior was highlighted by Mary Schapiro, NASD President of Regulatory Policy and Oversight in her remarks to the Spring 2004 Securities Conference where she listed recent actions of the NASD:2
* Prudential Securities was fined $2 million and ordered to pay customers $9.5 million for sales and switches of annuities that violated New York State regulations.
* A Louisiana broker was permanently barred from the industry and ordered to pay more than $1.5 million in restitution for making unsuitable annuity sales to older, conservative investors.
* A suit was filed against Waddell & Reed charging the firm with recommending 6,700 annuity exchanges to its customers-generating $37 million in new commissions and costing the customers $10 million in surrender fees-without determining whether the transactions were suitable. One Waddell & Reed adviser was quoted in a Wall Street Journal article as saying, "I have no problem selling an annuity that may cost [0.45 percentage point] more...because I have to support my family and pay my assistant and other business overhead."3
Shapiro noted that those are just three of over 80 disciplinary actions taken against unacceptable sales practices in the...