A special task force of the state regulator announced Monday that it will revise the rules governing indexed universal life illustrations — with an added twist.
The Actuarial Life Working Group opened a comment period on Actuarial Guideline 49-A until September 6 — echoing a comment period just closed by the Indexed Universal Life Illustration Subgroup. The LATF oversees a subset of the hierarchy of the National Association of Insurance Commissioners.
But the LATF added a twist to its comment period: “plus consideration of limited, targeted revisions to the Model Life Insurance Illustration Regulation (#582).”
The overall effort to regulate the life insurance illustration model was an acrimonious process that took years before the NAIC adopted it in 1995. In the decades since, insurers have come up with various product features that have rendered the illustration guidelines ineffective, consumer advocates say.
“Regulators are trying to fix leaks in a flawed infrastructure that continually provides misleading information to consumers,” said Birney Birnbaum, executive director of the Center for Economic Justice. “The current illustration regime allows underwriters to ‘illustrate’ investments in ways not permitted for other types of investments.”
But regulators have been reluctant to revive the overall illustration model in recent years. Insurers will be “vehemently opposed” to reopening #582, Birnbaum said.
Instead, the NAIC adopted AG 49 in 2015, but insurers quickly circumvented it by offering IUL products with multipliers and bonuses. This led to AG 49-A passed in late 2020 following this LATF directive: “designs with multipliers or other enhancements shall not illustrate better than designs without multipliers”.
In another key change, the IUL illustration lending rate was set at 50 basis points higher than the lending rate. In AG 49, the lending rate can be 100 basis points higher than the policy loan rate.
In response to the subgroup’s call for comments, Cheryl Moore of Moore Market Intelligence and Bobby Samuelson of The Life Product Review took the unusual step of co-authoring a letter outlining the problems with AG 49-A. The pair are competitors in the field of product intelligence.
The Moore/Samuelson letter does not preclude the need for immediate regulatory action. Some fixed-rate bonus IULs can generate illustrated income more than 60% higher than an underlying index such as the S&P 500, they wrote.
“In our view, this is completely inconsistent with the intent of the regulators in drafting AG 49-A,” the letter said. “The craftsmanship currently found in the illustrations is similar in effect and pervasiveness to the redemption restrictions and multipliers that proliferated after AG 49 and led to AG 49-A.”
Several insurers countered with comment letters to the subgroup, arguing that AG 49-A succeeds in its purpose. Allianz submitted its comment letter in February defending the use of volatility controlled indices (VCI).
“Equity markets, bond markets and therefore VCIs in general have underperformed since February, but this does not materially change the content of the letter,” Austin Bichler said in a cover letter. Bichler is assistant vice president and actuary for Allianz.
“These challenging market conditions highlight the protection inherent in IULs while demonstrating the additional value that VCIs provide when combined with fixed bonuses,” he wrote.
In the original letter, Bichler said Allianz customers received credits and other benefits that exceeded the insurer’s S&P 500 allocation.
“Treat illustrations holistically”
Transamerica sent a letter approving the reopening of the entire illustration model. The insurer also noted that it does not sell a product with unlimited VCI and a fixed bonus — the type of products that critics claim are gaming AG 49-A.
“We can also support the commission’s consideration of a longer-term, multi-year effort to revise the illustrations for all fixed life insurance products purportedly involving model reopening,” said the letter from Andrew DeMarco, head of Life Solutions for Transamerica. “We believe that such an effort should treat illustrations holistically across products, rather than taking a piecemeal approach.”
Committee A refers to the Life Insurance and Annuities Committee, which oversees the LATF and would vote to send any changes to the model to the NAIC Executive Committee for final adoption.
Birnbaum said that a limited and targeted reopening of model #582 “will not significantly address the underlying problem with the illustrations.”
The request for comments asks the authors to consider four options for AG 49-A:
(a) Attempt to quickly correct current concern (some companies exemplify unconstrained policies to control volatility better than capped S&P 500 policies) with a brief revision of AG 49-A; may discuss with committee whether there are plans to look at wider life illustration issues;
(b) Make no changes to AG 49-A (allow current practices);
(c) Attempt to broadly revise AG 49A to address the current concern and any other potential concerns identified; or
(d) Apply a hard limit on various metrics to illustrate the IUL.
InsuranceNewsNet Senior Editor John Hilton has covered business and other events in more than 20 years of daily journalism. John can be found at [email protected]. Follow him on Twitter @INNJohnH.
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