ACLI Version Wins In IUL Illustration Fight

By John Hilton

State insurance regulators sided with an industry trade group Thursday in choosing language designed to tamp down wayward indexed universal life illustrations.

But not before a rift further widened between industry factions.

Life Actuarial Task Force members voted 15-2 in a “straw poll” to proceed with language put forth by the American Council of Life Insurers. The language is designed to shore up Actuarial Guideline 49 and bring IUL illustrations more in line with actual returns.

The task force plans to present a proposal for adoption by its parent A Committee during the committee's July 10 call.

California and New York voted no. The task force accepted the ACLI language over an “independent proposal” signed by a group of 13 executives, analysts and academics.

Some regulators agreed that the ACLI changes might end up being just a short-term fix. But the IP proposal goes beyond the charge of the task force, said Fred Anderson, deputy commissioner of insurance for Minnesota.

"I don’t think making all IUL illustrations substantially more conservative was ever on the table with respect to the current charge," he said. "If we happen to see further abuses or aggressive behavior on the illustrations side, those proposals could be part of what’s ahead in the future."

Anderson chairs the IUL Illustration Subgroup, which has discussed amending AG 49 for close to 18 months.

The background: AG 49 was adopted by the NAIC in 2015 to rein in IUL illustrations that were showing consumers unrealistic returns. Critics say insurers almost immediately got around the new rules by offering IUL bonuses and multipliers.

The mandate: The IUL Illustration subgroup working on tightening AG 49 was thrown a curveball in October when the Life Actuarial Task Force sent this mandate to members: designs with multipliers or other enhancements should not illustrate better than non-multiplier designs.

The context: IUL sales are a source of strength for insurers. Overall total universal life new premiums increased 31% in the fourth quarter 2019, primarily driven by IUL products.

All Reward, No Risk

Any solution to shoring up AG 49 must include the entirety of the guideline, argued Bobby Samuelson, executive editor of Life Product Review and a signatory to the independent proposal. The main problem with IUL illustrations is risk cannot be illustrated, he explained.

"Is it fair, is it right, to illustrate rewards without risk?" he asked task force members.

Larry Rybka, president and CEO of Valmark Financial Group was more succinct: "Cicero said, 'There are things that may be permissible, but they are not always honorable.'

"Everyone is moving to a best-interest standard and I don’t think the current industry practices as it relates to IUL are anywhere close to meeting a best-interest standard," added Rybka, who also signed the independent proposal. "And I think the life insurance industry needs to clean up its own house."

Chairman Anderson previously warned industry representatives that new language should focus on keeping illustrated values in the 6-7% range. The subgroup settled on language submitted by ACLI, which was put out for public comment earlier this year.

In a letter, Brian Bayerle, senior actuary for ACLI, said the trade group's language came out of a year of discussions with regulators, consumer advocates and others. ACLI included several illustrations to show how its changes would impact several different multipliers and other enhancements offered by carriers.

"Our proposal does not represent the interests of a handful of IUL writers, but rather the input of a broad collection of companies, including those who write IUL (with and without multipliers), and non-IUL writers," Bayerle wrote.

Both proposals start with the same two values: net investment earnings rate and market cost of hedges. The indepenent proposal relies on the independent Black-Scholes methodology for determining the illustrated performance.

By contrast, the ACLI proposal starts with the market cost of hedges to create the hedge budget and a supplemental hedge budget. An additional formula is used to produce the crediting rate cap for the benchmark index account.

Birny Birnbaum, executive director of the Center for Economic Justice, in a comment letter said the ACLI version was not consumer-friendly.

"It is beyond baffling why regulators would prefer the ACLI approach -- overly complex, untethered to reality and virtually impossible for regulatory or consumer accountability – to develop a maximum crediting rate," Birnbaum said.

The Past Is The Past

Speakers supporting the ACLI language accused the independent proposal signers of rehashing old arguments that were settled long ago.

"What the proponents of the IP [independent proposal] are asking LATF to do is to rewind the clock five years and admit that AG 49 is a mistake," said Scott Harrison, who represents insurers such as Lincoln Financial Group and Pacific Life. "Those of us who were part of that discussion five years ago, we’ve heard all that before."

Regulators also questioned whether time will permit legitimate development of another option.

"I think there’s good work that’s been done in this latest proposal that has come through, but I really believe if we want to get something done and curb the abuses, we need to look at this ACLI proposal," said Pete Weber, actuary with the Ohio Department of Insurance.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.