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Key Considerations for Advisors When Assessing the Financial Soundness of Annuities

Posted on February 22nd, 2024 at 1:42 PM
Key Considerations for Advisors When Assessing the Financial Soundness of Annuities

From the desk of Jim Eccleston at Eccleston Law 

Advisors play a crucial role in guiding clients through the complex landscape of annuity investments. While rating agencies like Fitch and S&P Global Ratings generally highlight the strength of annuity issuers, advisors still should scrutinize certain factors in their assessment process. According to ThinkAdvisor, here are five critical considerations when evaluating the financial soundness of annuity issuers:

  1. Surplus: The surplus, representing excess capital, stands as the primary safeguard for insurers. A robust surplus acts as a buffer against unexpected spikes in claims or defaults in an investment portfolio.
  2. Growth: Rapid growth, although appealing to stock analysts, can pose risks for clients. Advisors should be cautious of insurers experiencing substantial growth, as initial expenses associated with new premiums can be burdensome.
  3. Product Issuer: Annuity products often originate from subsidiaries or affiliates rather than the parent company. Client claims are tied to the specific company on the contract, emphasizing the need to assess the financial strength of the issuing entity.
  4. Reinsurance Considerations: Advisors should investigate the impact of reinsurance, particularly from affiliated or foreign reinsurers. Reinsurance from non-U.S. entities may lack transparent financial reporting, warranting extra scrutiny.
  5. Guaranty Funds: Understanding the complexities of annuity guaranty funds is crucial. While such funds aim to protect policyholders and annuity contract holders in case of issuer failures, coverage limitations, variations across states, and potential gaps should be carefully considered.

 

Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.

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