IUL Rate Projections Drop Slightly In Illustrations

By Cyril Tuohy

Maximum illustrated rates allowed for the most popular investment choice with an indexed universal life (IUL) policy dropped last year following the implementation of new actuarial guidelines in 2015 and early 2016, a new survey by Milliman has found.

During the first nine months of last year post-guideline illustrated rates ranged from 5.02 percent to 7.75 percent, with an average of 6.69 percent and a median of 6.86 percent, the survey authored by actuaries Carl A. Friedrich and Susan J. Saip found.

Pre-guideline illustrated rates ranged from 5.60 percent to 8.50 percent, with an average rate of 7.38 percent and a median rate of 7.65 percent, the survey found.

“The majority of IUL participants reported they have made adjustments to illustrations based on AG 49, but few participants have made changes to their product designs due to AG 49,” the Milliman report said.

On Sept. 1, 2015, the first phase of Actuarial Guideline 49, or AG 49, took effect establishing benchmark crediting rates and index value ceilings used in IUL policy illustrations.

Six months later, on March 1, 2016, additional provisions of AG 49 came into effect limiting interest rate differences illustrated between rates credited to loaned amounts and the corresponding rates charged to the loan balance.

The changes were designed to eliminate what is known as “loan arbitrage.”

At the time, some market analysts had warned AG 49 might quash product innovation in the IUL market.

AG 49 Questions New to Survey

Questions about AG 49 and its effects on IUL policies were new to the Milliman report titled UL/IUL Issues Survey, the tenth annual survey aimed at addressing issues in the UL and IUL market and at providing benchmark data for insurers.

Data was collected from a survey sent to insurers on Oct. 27, 2016.

Thirty-two UL and IUL companies submitted responses to the survey and 21 companies that reported IUL sales responded to questions on IUL illustrated rates and rates calculated under AG 49.

Credited rates used in IUL illustrations for the most popular strategies ranged from 5.29 percent to 7.70 percent in the first nine months of 2016, the researchers wrote.

Ten of the 21 insurance companies reported the credited rate dropped relative to the illustrated rate of one year ago, the report said.

One insurer reported no change and eight insurers reported increases in the illustrated rate relative to the credited rate, the researchers said.

The current median illustrated rate is 6.69 percent and the current average illustrated rate is 6.58 percent, the survey found.

Insurers Report Pricing Constraints

Nineteen of the 32 insurance companies submitting responses reported that the illustration actuary requirements constrained UL/IUL pricing.

Most insurers also said the constraints were more severe for universal life with secondary guarantees (ULSG), and eight of the 17 insurers reporting ULSG sales repriced their ULSG designs in the past 12 months, the survey found.

Practices used by insurers to illustrate in-force policies failing a lapse support test include discontinuing illustrations for some products, illustrating guarantees only, supporting the in-force block with surplus, creating new scales for illustrations, adjusting caps and increasing spreads, the report found.

In the first nine months of 2016, surveyed companies reported individual UL sales of $734.7 million, and IUL sales of $793.7 million, Milliman said.

Sales were measured by the sum of recurring premiums plus 10 percent of single premiums.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].