Consumer Group Rejects IUL Proposal

WASHINGTON — On what was supposed to be the eve of a key vote, consumer representatives of the National Association of Insurance Commissioners (NAIC) have asked the panel to go back to the drawing board in its year-long effort to craft new rules on indexed universal life (IUL) insurance illustrations.

The comments of the eight consumer representatives were filed Monday. The comments surrounded the Life Insurance and Annuities (A) Committee’s plan to discuss and adopt the current proposal, which originally was scheduled for a conference call Wednesday. However, the committee announced late Tuesday that the call is cancelled.

Under that proposal, agents would be allowed to show potential customers a document that supported crediting rates in the 6-to-7-percent range, although so-called “guardrails” mandated by the proposal could limit actual likely yields to as low as 4.5 percent.

Committee passage would be the next to final step in the long process of implementing the rule. The final step will be passage by the full NAIC, something that had been expected to occur by the middle of June.

Originally, the plan had been for the committee to approve the proposal Wednesday, with phase-in scheduled to begin Sept. 1 and the process completed by March 1, 2016.

Representatives of such firms as MetLife, Northwestern Mutual, New York Life and Pacific Life as well as the American Council of Life Insurers (ACLI) have spent the past months working with regulators on a compromise proposal.

An ACLI spokesman said today that the trade group would defer comment on the consumer group comment letter until after the A Committee vote Wednesday.

The consumer representatives’ letter suggested that one issue that should be considered as part of a new rule is guidance for illustration of long-term care (LTC) benefits and costs in an IUL or other life insurance policy that provides LTC benefits.

The consumer representatives argued that the guideline adopted April 16 by the Life Actuarial (A) Task Force (LATF) does not address key failures of current illustrations, that is, understate the gross return of the index investment and overstate the net returns of the IUL investments.

The letter acknowledged that the LATF actuaries identified a key problem with current illustrations, which is the use of unrealistic index returns.

But, the letter continued, the proposal’s plan to address only some of the problems on an interim basis “will lead to a failure to address remaining problems and/or frequent changes in regulatory requirements leading to confusion among regulators, insurers and consumers.”

Exacerbating the problem, the letter states, is the different implementation dates of separate provisions of the interim guidance. In addition, the letter-writers objected to part of the proposal that would require applying the new requirements only to policies sold after the implementation date, as opposed to policies in force after the implementation date.

The consumer representatives want the A Committee to have the LATF develop guidance for three illustration scales for IUL products.

The factors that they the rule to be redrafted to illustrate the gross return of the index, meaning the actual historical total return of the index; the net return of the index, meaning the historical amount that would have been credited to the policyholder’s investment account net of all investment-related charges; and the guaranteed returns to the policyholder, net of all investment-related charges.

The consumer group comment letter also asked that the new proposal require the new guidance to be applied to policies in force on or after an effective date. In addition, the group requested that experts in consumer information and disclosure play a role in developing the new illustrations rule.

Under the proposed phase-in to be voted on by the A Committee, provisions dealing with currently payable scale methodology as well as the so-called “guardrail” that limits the expected yield that can be illustrated for potential customers of an IUL will go into effect Sept. 1.

Provisions detailing information on policy loans and establishing additional standards will go into effect for all new business and in-force life insurance illustrations on policies sold on or after March 1, 2016.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at arthur.postal@innfeedback.com.

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InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at arthur.postal@innfeedback.com.