Proposed rule offers summary prospectus for variable insurance contracts

The Securities and Exchange Commission (SEC) on Oct. 30, 2018, issued a proposal to improve the way key information is presented to investors about variable annuity and variable life insurance contracts in Release No. 33-10569, Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts.

Comments are due Feb. 15, 2019.

The commission is proposing to establish a framework for disclosures that would let insurers and investment companies use a summary prospectus that gives investors a snapshot of the annuity contract, such as its terms, benefits and risks. Investors will be able to access more detailed information available online and electronically or in paper format upon request.

The proposal relies on a new rule, Rule 498A, from the Securities Act of 1933 to permit the use of a summary prospectus.

The commission said it is important to provide investors upfront with the most pertinent information in a concise and clear manner because variable contracts—which combine both investment and insurance features—are generally more complex than other retail investment products, such as mutual funds.

Investors can customize their contracts from a menu of optional benefits. Moreover, most have two-level fee structures, one for the contract and another for investment option. Other transaction charges may be imposed, such as withdrawals before a specific number of years.

In addition, the operation and terminology of the products can be difficult to understand. Variable contract prospectuses are often lengthy—frequently more than 100 pages—especially those that include optional benefits.

“We are concerned that the volume, format and content of disclosures in the variable contract context may make it difficult for some investors to find and understand key information that they need to make an informed investment decision,” the SEC said in Release No. 33-10569. “We anticipate that the proposed framework would improve investor understanding of variable contracts.”

In particular, the market regulator said it is contemplating the use of two types of summary prospectuses: an “initial summary prospectus” for new investors and an “updating summary prospectus” for existing investors. Both will have a layered disclosure approach.

The initial summary prospectus can only describe a single contract. The information would be presented in a standardized format. The SEC said this would also make it easy for investors to compare different variable contracts. The initial summary prospectus would include the “Key Information Table” that would provide a brief description of key facts in a specified sequence and would include a summary of five topic areas: fees and expenses, risks, restrictions, taxes and conflicts of interests.

“This is intended to highlight, in a consolidated location, important considerations related to these products, including certain unique aspects of the variable contract that might be unfamiliar to investors who have experience with mutual funds or other types of investment products,” the SEC said.

An update to the summary prospectus can provide information multiple contracts, given the limited subset of information provided, the commission said.

It would briefly describe any important changes in a contract. It would also include the same Key Information Table that was in the initial summary prospectus to remind investors of the key terms of the contract.

The SEC is proposing the use of the inline eXtensible Business Reporting Language (XBRL) for the submission of certain required disclosures in the variable contract statutory prospectus, including the Key Information Table. XBRL is an interactive, computer readable format that allows for more efficient analysis and comparison of investment products and financial reports.

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