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Variable Annuity Compliance: the Year of Going “Green”?
How the Summary Prospectus will Help Insurers Save Money and the Planet

by Jeff Levering, NewRiver, Inc.Thursday, April 1, 2010

In 2010, insurance executives and managers face many challenges in terms of helping their company rein in costs, remain compliant, and respond to mounting pressure to demonstrate sustainability in business practices.

Compounding these challenges is the wave of new investors that will enter the insurance market as a result of the Obama administration’s suggestions to include variable annuities more widely for use in retirement plans.  The good news is that this potential new legislation will certainly bring new customers.  However, because these new customers will most likely begin with potentially small balances, keeping costs down will be important to all parties.

Managing regulatory changes, such as new stricter “suitability” guidelines under FINRA’s Rule 2821 , will be time consuming and add additional expense.  But this one regulation could prove a panacea to help rein in costs while improving investor disclosure and providing built-in sustainability measures.

This year, fund companies will continue to adopt the SEC’s summary prospectus – a trimmed down prospectus document containing a scant 3-4 pages which can be used in lieu of the fat statutory prospectus –  enabling them to reduce or even eliminate print and postage costs, as well as cut down on the financial service companies’ carbon footprint.

The obvious question then becomes what are the cost savings if a summary prospectus is actually adopted for the VA industry?  Today, there are currently 22 million variable annuity contracts and an estimated 10 million “first dollar” prospectuses delivered annually.  Replacing the current prospectus with a slimmed down summary prospectus will reduce 92% of the paper – saving trees and cutting both print and postage costs.  With print and postage savings at $10 per contractholder a year, adopting a summary prospectus could provide a windfall of over $220 million to insurance companies and their fund partners.

In addition to the cost savings, there are other incentives to consider.  First, the reduction in the number of pages enables you to digitally print the summary prospectus with the trade confirmation and mail both in a single envelope.  Second, the summary prospectuses can be delivered electronically – eliminating paper altogether – cutting costs and significantly reducing the carbon footprint by eliminating the energy, transport and disposal costs associated with traditional print fulfillment.

Sustainability Resonates from the Boardroom to the Living room

Amid rising investor worries over global warming and shrinking natural resources, more companies are under pressure to develop sustainability into their business practices. According to Ceres, a national coalition of activists, investors, and others concerned about the environment, roughly 25% of Fortune 500 companies have a Board committee overseeing environment practices compared to less than 10% five years ago.  Shareholders are more active too with the number of investor proposals related to the environment nearly doubling between 2004 and 2008.

Consumers are also advocating green initiatives and are doing so with their wallets.  According to one prominent study , 79% of consumers say a company’s environmental practices are important in making their decision to purchase products from that company.

Implementing the Summary Prospectus – What Could Hold VA Firms Back?

As Ruth Epstein, Partner, Dechert LLC said, “It takes a village to deliver a Summary Prospectus.”  In 2007, Forrester Consulting was asked to study the impact of the proposed SEC Summary Prospectus by interviewing 150 companies that manufacture or sell mutual funds and variable insurance products.  The consensus among respondents was overwhelmingly in favor of the new rule – citing that it would be “great for investors” and for their companies.  Back in 2007, nearly two-thirds of respondents (64%) said they would “very likely consider” the Summary Prospectus.  The SEC estimated that 80% of fund companies would adopt Summary Prospectuses, partly fueled by demand from downstream distributors.

In November of 2008, the SEC approved this smaller mutual fund prospectus, and now in 2010 with this “Summary Prospectus” coming online, one thing is clear: carpe diem.  The summary prospectus is one of those rare times when both insurance companies and their fund partners are able to get a so many advantages all at once.  More specifically, they can:

  • Significantly lower disclosure fulfillment costs in both print and postage, which can reduce the per contractholder costs by over $10 a year;
  • Establish a tremendous “green” story brought on by significantly reduced documents and paper waste; and,
  • Provide simpler disclosure in an effort to strengthen customer satisfaction - which, as we all know, is extremely important in today’s climate of weakened investor loyalty.

Plus, with the SEC now talking actively about a summary contract prospectus, we really are on the cusp of an opportunity to totally rethink prospectus disclosure.
But Where to Begin?        

To accelerate the availability of summary prospectuses from their fund partners, insurance companies will need to complete a multi-pronged strategy by:       

  1. Identifying your fund partner group strategy –Taking the time to encourage fund partners to adopt the summary prospectus will drive savings, sustainability, and deliver a consistent customer experience.
  3. Reviewing your participation agreements – Insurance companies and fund companies share the cost of prospectus delivery.  As a result, you should consider how your agreements could change with this new opportunity.
  5. Upgrading your website to meet summary prospectus requirements – You’ve spent a lot of money on branding and customer service, but the summary prospectus rule could have your customers going to the fund company’s website.  In order to have your website meet the requirements the SEC has laid out for availability, you’ll need to satisfy the following:                  
    • The website must be continuously available 24/7 and, if it goes down, the appropriate resources and procedures must be in place to promptly restore it.
    • You must ensure 2-click access from the summary prospectus to the statutory prospectus or statement of additional information hosted on your website.
    • The website must provide access to all related disclosure documents including the most recent summary prospectus, product prospectus, SAI, supplements, and semi-annual and annual reports (plus any supplements to those documents).
    • The table of contents within the electronic product prospectus and SAI on your website must be hyperlinked to allow policyholders to move between the sections within the TOC and back.
    • The website must provide “continuous access” to the summary prospectus for up to six months after the document is provided.  This is an important consideration especially if you make a change to your fund lineup.
  7. Really evaluating whether to build or buy – This is the ultimate decision: do you have the team, resources and know-how to build your solution in-house or do you require an affordable, trust-worthy outsourced solution?
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