IUL Illustration Proposal Goes Up For Public Comment

WASHINGTON – A task force in charge of crafting new rules governing indexed universal life insurance (IUL) illustrations agreed to seek public comment on a proposal that would result in crediting rates in the 6-7 percent range and put limits on loan leveraging.

This represents another step in the National Association of Insurance Commissioners’ (NAIC) efforts to adopt comprehensive new rules governing the illustrations to be used in selling IUL. The NAIC’s Life Actuarial (A) Task Force (LATF) agreed to seek public comment on the proposal at a conference call Thursday.

The proposal is broken into separate sections for the Currently Payable Scale and the Disciplined Current Scale. Specifically, the proposal stipulates that the illustrated scale must be the lesser of the Currently Payable Scale and the Disciplined Current Scale.

One actuary termed this “a critical component of the proposal as it represents the main control over the maximum illustrated rate.”

The actuary said that, for the Currently Payable Scale, the proposal uses a look-back approach that generally results in rates in the high 6s (6.83 percent for a 0 percent floor/12 percent cap product).

For the Disciplined Current Scale, styled by the actuaries as a “guardrail,” the proposal caps the investment return on options at 45 percent.

On the call, LATF approved several amendments to the version released just a day earlier. One such change closes a potential loophole, according to an interested party.

Concerns have been raised that the proposal could be interpreted to apply only to policies where "the illustrated credited rate is tied to an external index or indices." One suggestion was for LATF to delete the word "illustrated" to avoid a company arguing that their illustrated rate is "fixed," and therefore falling out of the scope.

In addition to limiting the illustrated crediting rate, the proposal allows for no more than 100 basis points of loan leverage in IUL illustrations.

The issue of loan arbitrage was discussed at length during the conference. Asked about the issue, one actuary said that, based on the comments, “We believe LATF prefers to eliminate loan arbitrage on all products at some point.”

However, the actuary concluded from the comments by the LATF members, that the consensus of the regulators was that, “using this actuarial guideline to eliminate loan arbitrage for IUL would expose LATF to criticisms of treating IUL more punitively than other products.”

For now, “permitting 100 basis points of arbitrage on IUL allows LATF to defer taking action on loan leverage for other products,” the actuary said.

The proposal meets a key concern of those looking to ensure that IUL illustrations are more in line with the requirements contained in NAIC’s Life Insurance Model Illustration Regulation, according to one actuary.

However, the likelihood that the proposal will go into effect this year grew cloudier, based on comments at the conference call in which the draft rule was approved for comment.

That’s because the proposal calls for the rule to be effective Sept. 1. This is two months later than the July 1 deadline the LATF sought to meet when it debated the issue at the NAIC fall meeting in November.

In addition, comments by the representative of the American Council of Life Insurers (ACLI) indicated that the ACLI would seek extra time beyond the March 11 closing date set by the LATF for comments. This would give the ACLI time to canvass its members on its views and present them to the LATF.

Some ACLI members also claimed that they will need time beyond the proposed Sept. 1 deadline to prepare documents, brief its agents — and perhaps even restructure products in order to comply with the new rule and compete in the marketplace. It is not yet known whether the regulators will be sympathetic of those concerns or whether they will devise an alternative approach that results in the new rules taking effect in 2015, according to several industry officials dealing with the issue.

The three-page proposed rule represents a compromise, a blend of the views of the coalition of insurers led by MetLife as well as those of two groups of IUL writers, one lead by Minnesota Life and the other by Pacific Life. The other members of the coalition include Northwestern Mutual and New York Life. The proposal also includes several provisions from the original ACLI proposal that was submitted to LATF last summer.

The proposal was approved for comment by all members of the LATF except the actuary representing the New York Department of Financial Services. Its representative, Bill Carmello, said he opposed it because he supports IUL illustration proposals advanced by the coalition of insurers headed by MetLife.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].