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>The creation of a federal insurance office as part of the U.S. financial services regulatory reform law is a positive step but pitfalls to the office will depend on how it’s designed, according to the president of Prudential Financial’s U.S. annuities business.

“We don’t think it’s an either/or as it relates to federal regulation or state regulation,” said Stephen Pelletier, president of Prudential Annuities, the integrated domestic annuities business of Prudential Financial (NYSE: PRU). There’s a place at both the federal and state levels for regulation of the industry, he said.

Is the office an early step towards the possible creation of an optional federal charter? If that happens, Prudential will “assess the relative benefits of going that route,” he said.

Also under the law, the U.S. Securities and Exchange Commission is directed to study the similarities and differences regarding regulation of broker-dealers and investment advisers when providing investment advice about securities and file a report to Congress within six months of enactment, according to the American Council of Life Insurers, referring to the “standard of care” or fiduciary standard provision.

The idea behind a fiduciary standard is that anyone who sells a security/investment product, such as a variable annuity, must act solely in the best interests of the client. The SEC is authorized to address the standard of care through rule-making, subject to the study’s conclusions and recommendations, the ACLI said.

Prudential supports provisions that are in clients’ interests — things that “strengthen the transparency of the industry” to clients and the level of service provided to clients — those are positive objectives, Pelletier said. “We’ll obviously take a look at how this study achieves those goals and respond accordingly.”

Prudential Annuity designs variable and fixed annuities and sells them through independent financial planners, banks, wirehouses, regional firms and insurance agents.

Last year, Prudential Financial, under Pelletier’s watch, became the No. 1 seller of variable annuities in the United States, with sales of $16.1 billion, according to Morningstar. It had never been No. 1 in the annual company ranking. Prudential Financial, with year-to-date sales of $4.86 billion, remained the No. 1 seller in the first quarter of this year.

Pelletier said he started in his current post “the day that Lehman Brothers went bankrupt. So it was the beginning of an eventful period.”

State insurance regulators are looking at suitability of annuity sales — or making sure that a product is sold to investors who need it and can best utilize it — an objective Prudential supports, he said.

In terms of how those improved suitability standards are achieved, the company thinks it’s “appropriate that the regulators bear in mind” the appropriate relationship between the manufacturer of the product on the one hand and the distributor on the other and how they “can best collaborate to achieve improved suitability standards,” Pelletier said.

Prudential Insurance Company of America currently has a Best’s Financial Strength Rating of A+ (Superior).

To see the entire interview with Pelletier, go to: http://www3.ambest.com/ambv/displaycontent/MediaArchive.aspx?RC=176179

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)

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