SEC IM Division Director on Life Insurance Company Products (with Lofchie Comment)

SEC Director of the Division of Investment Management, Norm Champ, delivered a speech regarding the challenges facing the annuities business, including those presented by the persistent low interest rate environment and by volatile equity markets here and abroad. Director Champ also discussed (i) the recently published financial literacy study that was mandated by Dodd-Frank (see link below); (ii) the IM's investor advisory committee; (iii) industry communications; (iv) IM division priorities; (v) a recent 403(b) Plan No-Action Letter; and (vi) changes that insurers have made to the terms of outstanding products. One of the principal subjects of Director Champ's talk was the very low level of financial literacy among U.S. investors (many of whom he said do not know the difference between equity and debt) and, thus, the need for annuity issuers to communicate in clear and simple language using "bullet points, tables, charts and graphs."

Lofchie Comment: One of the challenges (as observed by Director Champ) causing the insurance industry to curtail risk exposure in insurance products is "longevity risk" that is a risk to which sellers of annuities and other pension products are subject as the recipients or beneficiaries are living longer than expected. This longevity risk is predicted to be the source of a further financial crisis. It is an exposure of private pension plans as wells as state pension provision. A number of schemes are closing or benefits are being reduced or pension age is being raised. The news of this risk has largely been focussed on the EU countries rather than the US. A number of products have been developed in Europe (and continue to be so) to "hedge" or transfer elements of this risk to the capital markets or to defer or transfer this risk by financial mechanisms being developed within the industry. Persons wishing to discuss these risks and related financial products may contact Jennifer Donohue in our U.K. office.

View speech in full here (links externally to SEC website).Link here to the Dodd-Frank financial literacy study. As reported in the news item, the lead line of the study was that "Americans Lack Basic Financial Literacy."