State insurance regulators are determined to make changes that will result in more realistic indexed universal life illustrations.
That means amendments to Actuarial Guideline 49. A pair of different groups within the National Association of Insurance Commissioners worked steadily throughout May and June to send a new AG 49 to the Life and Annuity Committee for its July 10 call.
The work to retool and tighten AG 49 is just one of two key regulations that are nearing the finish line. The Securities and Exchange Commission has declined to delay the June 30 effective date for its Regulation Best Interest, which sets out new rules for brokers.
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 IUL Illustration Subgroup had been working on tightening AG 49 for months when the Life Actuarial Task Force sent this mandate to members in October: Designs with multipliers or other enhancements should not illustrate better than nonmultiplier designs.
Regulators and industry representatives have been working ever since to find language that would find a happy medium between allowing carriers to be creative and satisfying this mandate.
The task force voted in May to work off language proposed by the American Council of Life Insurers. In doing so, regulators rejected an alternative proposal that would have delved deeper into AG 49.
Not everyone was happy with that decision.
“Everyone is moving to a best-interest standard, and I don’t think the current industry practices as they relate to IUL are anywhere close to meeting a best-interest standard,” said Larry Rybka, president and CEO of Valmark Financial Group. “And I think the life insurance industry needs to clean up its own house.”
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 May 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.
Could Revisit Guideline
But many regulators countered that a time crunch necessitated a smaller fix to AG 49.
“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,” said Fred Anderson, deputy commissioner of insurance for Minnesota, who chairs the IUL Illustration Subgroup.
The task force cleared one issue in June when members voted to limit any changes to IUL illustrations to new policies only.
Applying illustration changes to old policies would create a lot of potential confusion, on replacement policies, for example, said Brian Bayerle, senior actuary for ACLI. Consumers could end up seeing something completely different from an illustration that was appropriate when the initial policy was purchased, he explained.
“I don’t necessarily think we ended up with [AG 49 changes] that industry loves,” Bayerle said. “I think we have a policy that industry can live with. We do think the best path forward is to apply this to policies on a going-forward basis.”
Again, Birnbaum was in opposition.
“It’s nonsense,” he said. “How can somebody claim with a straight face that a consumer is going to be confused by getting better information than they got previously?”
As this issue went to press, the task force was deciding between three options for establishing a policy loan interest credited rate. The group was expected to send a final amended AG 49 to the A Committee on June 25.
If the A Committee votes to adopt the changes, the amended AG 49 will go to the Executive and Plenary Committee for a final vote. That would be the last vote before the new rules go to the states for possible adoption.
Regulation Best Interest
The SEC’s Reg BI is expected to be the rules brokers will adhere by the time this issue hits mailboxes. There could be a snag in Chairman Jay Clayton’s timeline, however.
On June 2, a three-judge panel of the 2nd U.S. Circuit Court of Appeals heard arguments challenging Reg BI. It often takes weeks for an appeals court to render its decision. In the meantime, brokers need to be ready to comply.
Reg BI imposes a “best interest” standard of conduct on broker-dealers when making a recommendation to a consumer for any securities transaction or investment strategy involving securities.
A broker-dealer acts in the best interest of the retail customer at the time the recommendation is made by not placing his or her own financial interests ahead of the interests of the retail customer.
A firm satisfies Reg BI by complying with four obligations: disclosure, care, conflicts of interest and compliance. The client cannot waive Reg BI protections.
In addition, Reg BI requires a Form CRS be delivered to clients. Essentially another disclosure, Form CRS is to include services received, the cost of services, potential conflicts of interest and whether the firm or its personnel have any disciplinary history.
The court case was filed by XV Planning Network and reflects the disappointment of financial advisors that the broker-dealer standard was not raised to the fiduciary level.
At the oral argument, counsel for the plaintiffs argued that Reg BI does not meet the expectations of the Dodd-Frank Act. Congress required the SEC to “harmonize” the investment advisor and broker-dealer regulations, they argued.
In Dodd-Frank, Congress authorized the SEC to proceed with rulemaking to address the standards imposed on brokers and advisors for providing personalized advice, taking into consideration the findings of a staff study.
The advisor community maintains that Congress intended the SEC to extend the fiduciary duty imposed on investment advisors to broker-dealers, and the SEC fell short. Eight states represented by the New York attorney general’s office joined the XY Planning side, advocating the view that Reg BI was contrary to law and exceeded the SEC’s authority.