State insurance regulators resolved a final timing issue Thursday with rule changes designed to tighten up indexed universal life illustrations. But the vote renewed old divisions over the changes.
The National Association of Insurance Commissioners' Executive Committee and Plenary adopted Actuarial Guideline 49 updates in August after a long process. But the effective date of the newly named AG 49A needed to be amended due to delays prompted in part by the pandemic.
The effective date adopted Thursday is for all policies issued after Dec. 14, although New Jersey Insurance Commissioner Marlene Caride noted that insurers can voluntarily choose to apply the new AG 49A guidelines to policies issued earlier.
That change of effective date passed over two No votes from New Mexico and New York.
"Insurers have used these illustrations to compete with each other in selling these specific products by showing what we believe are unrealistic growth of cash values," said My Chi To, executive deputy superintendent of the Insurance Division at the New York Department of Financial Services. "This harms and misleads consumers that we as regulators have a duty to protect. And we believe the NAIC and all of us should be strong advocates for the use of more realistic and reasonable crediting rates to make sure consumers understand what they're buying."
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 new AG 49A mandates that designs with multipliers or other enhancements should not illustrate better than non-multiplier designs. In another key change, the IUL illustration crediting rate was set at 50 basis points higher than the policy loan rate. In AG 49, the crediting rate could be 100 basis points higher that the policy loan rate.
Help For Insurers
In a separate vote, the Executive Committee and Plenary adopted a reduction in the standard minimum nonforfeiture interest rate for individual deferred annuities to help insurers cope with historically low interest rates.
The nonforfeiture rate drops from 1% to 0.15%. Citing COVID-19 impact, insurers have pleaded with regulators to reduce the nonforfeiture rate. The 10-year Treasury rate fell well below 1% amid the virus outbreak in March and has not recovered, making it very hard for insurers to make good on product guarantees.
"Insurers are unable to offer a number of annuity products due to the financial strain caused by the 1% minimum and this current very low interest rate environment," Caride said. "This minimum does not prohibit a company from guaranteeing more than that."
Nonforfeiture means the amount an insurer must pay a consumer who surrenders a cash value policy or any policy with such a nonforfeiture benefit. The benefit is based, in part, on an interest rate to reflect earnings on policyholders' money.
New York again voted No on reducing the nonforfeiture rate.
"Again, this is in light of the high potential surrender penalties for these products," My Chi To said. "We believe consumers should have meaningful guarantee of interest rates and therefore we oppose the amendment."
New York was joined in opposition by Washington state, Nevada, Virgin Islands and New Mexico.
A recent court ruling created an additional stumbling block to applying the reduced nonforfeiture rate right away, Caride explained.
On Dec. 4, the Interstate Insurance Product Regulation Commission met and passed an emergency rule to stay the effectiveness of the NAIC change to the nonforfeiture rate for 120 days.
The pause is needed in light of a recent Colorado Supreme Court opinion that concluded "a conflict between state law and Uniform Standards is not a proper delegation of authority under Colorado’s state constitution where state statute would provide a more beneficial outcome," the commission stated in its stay resolution.
"The Interstate Insurance Product Regulation Commission is exploring the implications of the Colorado Supreme Court opinion ... with respect to circumstances when a state statute conflicts with a provision in the Uniform Standards, and the state statute, in certain circumstances, is more beneficial to the policyholder or beneficiary when compared to the provision of the Uniform Standards," the resolution read.
New product filings will continue to be reviewed under the 1% nonforfeiture rate until the commission concludes its review, according to the resolution.
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.