Insurance industry pushes ‘quick fix’ for IUL illustration issues

If state regulators were looking for a wide range of opinions on how to fix troublesome indexed universal life illustrations from a comment period that closed last week, mission accomplished.

On one side, Larry J. Rybka, chairman and CEO of Valmark Financial Group, ripped current IUL illustration and sales practices.

"The abuse of IUL products, especially when financed, presents greater risk to consumers than anything I have seen in my 36 years in the business," Rybka wrote. "The NAIC must act firmly and quickly to end this abuse."

On the other side, industry representatives say a "quick fix" to existing rules will address concerns sufficiently.

"Regulators have expressed interest in pursuing a 'quick fix' to [Actuarial Guideline] 49-A to address concerns around the illustration of volatility-controlled indices," wrote the American Council of Life Insurers. "We would support an effort to discuss and address the specific regulatory concerns while maintaining the illustration of key features of the policies."

ACLI only supports those changes to future policies, not applied retroactively, the letter added.

The comment period on how to best fix AG 49-A was ordered by the Life Actuarial Task Force, part of the National Association of Insurance Commissioners. LATF regulators added a twist to its comment period: "plus consideration of limited, targeted revisions to the Life Insurance Illustrations Model Regulation (#582)."

Reopening the overall illustrations model regulation would be a significant undertaking. Insurers and industry groups were not enthusiastic about that idea.

"We believe we need to better understand what LATF is hoping to accomplish by opening the model regulation before we can fully comment," wrote Seth Detert, director, actuary, Life & Annuity Products at Securian Financial Group. "The model regulation applies to several types of products, thus adding IUL-specific language to the regulation could have unintended consequences that need to be thoroughly thought-out and vetted."

Long history

The overall life insurance illustration model regulation effort 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 illustration guidelines ineffective, consumer advocates say.

The NAIC adopted AG 49 in 2015, but insurers quickly got around it by offering IUL products with multipliers and bonuses. That led to AG 49-A, adopted in late 2020 after this LATF directive: "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.

Still, what many consider to be unrealistic IUL illustrations continued.

For example, some IUL fixed interest bonuses can generate illustrated income more than 60% higher than a Benchmark Index Account [such as the S&P 500], wrote Sheryl Moore and Bobby Samuelson, who are competing product intelligence analysts. The pair co-authored a pair of comment letters.

"This is, in our view, entirely inconsistent with the intent of regulators in crafting AG 49-A," their initial letter reads. "The gamesmanship currently occurring in illustrations is similar in effect and pervasiveness to the buy-up caps and multipliers that proliferated after AG 49 and resulted in AG 49-A."

Rybka reviewed sales materials from more than 100 proposed IUL transactions and more than dozen cases being litigated, he wrote.

"We see very few where the extent of the risk is presented let alone understood by the consumer," he added. "I think them analogous to Warren Buffett’s warning on hedge funds, these are financial weapons of mass destruction. Unlike other illustration problems in the past, the damage is not limited to insurance that costs more, but risk that it wipes out substantial proportions of client’s net worth."

Solutions offered

The most popular "quick fix" offered via the comments would put a "limit on indexed illustrated rates of 145% of each indexed account’s hedge budget," as explained in a letter signed by Allianz, John Hancock, Lincoln National, National Life Group, Pacific Life and Sammons Financial.

This would extend the 145% limit on "assumed earned interest rate" set forth in AG 49.

AG 49 states that: "If an insurer engages in a hedging program for index-based interest, the assumed earned interest rate underlying the disciplined current scale shall not exceed 145% of the annual net investment earnings rate."

While this quick fix would not be a panacea, the insurers wrote, it is a good start.

"While this approach could still result in some index accounts illustrating slightly higher than the Benchmark Index Account," their letter reads, "it would quickly lower the illustrated values of volatility controlled indices and allow regulators and interested parties to begin a thorough analysis to determine the scope, approach, and implementation of a long-term solution."

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.

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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.