Insurance regulators in New York earlier this week beat up the global insurance giant AXA SA (OTCQX:AXAHY) pretty good due to shoddy communication with clients about changes the company made to its AXA variable annuity contracts.
The $20 million fine against the U.S. arm of the French insurer is the state's largest penalty against an insurance company. That alone tells you the seriousness of AXA's variable annuity shortcomings.
AXA failed to adequately report changes in certain retirement income contracts, according to Leslie Scism of The Wall Street Journal. And those changes were clearly to the detriment of the investor.
"The New York State Department of Financial Services, in a consent order with AXA Equitable Life Insurance Co., argued that changes in variable annuities limited customers' investment return without providing adequate notice to the state," according to Scism.
In other words, AXA made these changes to variable annuity contracts without bothering to make sure the client understood what it was doing. And the changes only worked to limit the investors' gains, meaning the poorly disclosed changes curbed investors' returns.
This revelation only underscores the bad rap that variable annuities have had for some time.
As this blog noted in January, variable annuities are expensive, with brokers charging commissions between seven and ten percent of the amount invested. They are extremely difficult to understand, due to layers of opaque surrender charges and fees. And - because of tax deferrals - variable annuities are not appropriate for retirees, even though many brokers can't resist the fat commissions for selling variable annuities to older investors.
AXA and other insurance companies had no problem changing rules for variable annuities after the credit crisis, Scism reported. That means that all variable annuity investors should call their brokers and demand to know if any changes were made surreptitiously to their variable annuities.
Insurance companies loaded the product with goodies to entice investors before the credit crash of 2008. When the market went south, they pulled back on those variable annuities features that were favorable to Mom and Pop investors.
"Industrywide, tens of billions of dollars of (variable annuities) were sold in several years leading up to the financial crisis with generous guarantees of steady income for the buyer's lifetime, even if the fund accounts decline," Scism reported.
"Immediately after the crisis, insurers pulled generous versions from the marketplace and launched new ones with scaled back benefits, higher prices and less choice in the funds' menu to reduce the volatility and risk faced by both the consumers and the insurers," Scism wrote. "The AXA Equitable unit was among those making changes in some versions it had sold."
These changes are what got the regulators' attention. "Here, AXA changed the rules on these important products midstream and should have done more to disclose these changes" to New York insurance regulators, said New York's Superintendent of Financial Services Benjamin M. Lawsky, according to Scism.
New York regulators found that AXA was not working in the best interest of its clients who purchased high-commission variable annuities from brokers. If you own a variable annuity, from AXA or another insurer, call your broker and make sure the insurance company hasn't made disadvantageous changes. The variable annuity contract is supposed to stick to its benefits and not work to shortchange investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.