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U.S. Annuities Sales Boom After Fiduciary Rule Kicks the Bucket

A series of interest rate hikes by the U.S. Federal Reserve this year has allowed insurers to offer consumers higher interest rates for many annuity products.

(Reuters) - U.S. annuities sales are booming months after the demise of a regulation that targeted the product, which had required that brokers put customers’ interests ahead of their own compensation.

Several U.S. insurers reported surging annuities sales when outlining third-quarter results in recent weeks. American International Group Inc’s (AIG.N) individual retirement business posted $3.2 billion in annuities sales, a 65 percent jump from the year-ago period. Lincoln National Corp (LNC.N) and Brighthouse Financial Inc (BHF.O) detailed gains of 61 percent and 43 percent, respectively.

The companies can thank the end of a Department of Labor regulation known as the fiduciary rule. Announced during the Obama administration, the rule required brokers to act in clients’ “best interest” when offering retirement advice, and inform them about commissions and other incentives they received for selling products like annuities.

“While the clarity that occurred because the DOL fiduciary rule was vacated did help, we believe the most influential were the economic factors, particularly interest rates,” said Catherine Theroux, a spokeswoman for LIMRA, an industry group.

A series of interest rate hikes by the U.S. Federal Reserve this year has allowed insurers to offer consumers higher interest rates for many annuity products, Theroux said.

Total annuity sales were $59.5 billion during the quarter ending June 30, according to Limra Secure Retirement Institute. Sales had not been as high since early 2015, just before the rule was being put in place.

But the rule effectively died in June, when the Trump administration declined to pursue a U.S. Supreme Court appeal that might have kept it alive. While the U.S. Securities and Exchange Commission and state regulators are working on their own versions, consumer advocates say they do not expect investors to be as protected, particularly when high-fee annuities are involved.

“It still permits egregious products and egregious sales,” said Barbara Roper, director of investor protection at the Consumer Federation of America, about the most recent draft of a National Association of Insurance Commissioners (NAIC) proposal.

In the most basic annuity, a customer gives a lump sum of cash to an insurer and receives a payment each month over a set number of years, sometimes for life.

Consumers can benefit from that kind of steady income during retirement, but problems often arise with complex products, like fixed-indexed or variable annuities, Roper said. Investors often do not understand the risks and costs, which can be hidden in the fine print, she said.

Fees for complicated annuities can be 4-9 percent of the principal, industry sources said.

The SEC is working on an investor protection rule it calls “Regulation Best Interest,” while the NAIC plans to meet on Thursday in San Francisco to smooth out differences among state regulators for a proposed model rule that other states could later choose to adopt.

The American Council of Life Insurers, an industry group, has said it supports a best-interest standard, but that a new rule should not restrict types of compensation that agents and other sellers may receive nor require them to recommend the least expensive product.

New York moved ahead of other states in June by issuing a regulation that requires insurance agents and brokers to act in consumers’ best interest when selling annuities and life insurance. Although the New York State Department of Financial Services wants others to adopt the rule, which becomes effective in August 2019, the NAIC opposed some of the language.

Iowa Insurance Commissioner Doug Ommen expressed concern about using the term “best interest” because it could trigger litigation against insurers and agents, according to minutes of an August meeting.

The NAIC’s most recent draft of the rule would require insurers and agents to “act in the interests of the consumer” without placing their own financial interests first. It would not require them to recommend the best-priced products.

Birny Birnbaum, executive director of the Center of Economic Justice, said the draft does not go far enough. “There is nothing in the proposal that forces the consumers’ interest ahead of the insurers’ interest,” he said.

Reporting by Suzanne Barlyn; Editing by Lauren Tara LaCapra, Leslie Adler and David Gregorio

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