NAIC Executive Committee Adopts Contentious AG 49 Changes

By John Hilton

A National Association of Insurance Commissioners' committee had the final word Friday on Actuarial Guideline 49, approving changes designed to tighten up indexed universal life illustrations.

The executive committee and the plenary approved the newly named AG 49A with a lone No vote by New York. There were no comments accepted, but Jillian Froment, director of the Ohio Department of Insurance and chair of the NAIC Life Insurance and Annuities Committee, addressed two objections registered by consumer advocate Birny Birnbaum.

Birnbaum pressed to include language banning illustration outcomes suggesting that the rate the policy will pay the policyholder is higher than the rate the policyholder will pay to borrow from the policy.

Birnbaum, executive director of the Center for Economic Justice, said this "riskless arbitrage" is a dangerous trap for consumers.

"This is analogous to taking out a mortgage on your home and using that money to invest in the stock market – because the market has averaged returns of, say, 8%, while your mortgage loan rate is 3%," he said in a comment letter. "Of course this would be terrible financial advice because the loan cost is fixed – you have to pay the interest regardless of what your investment returns might be and the investment returns are erratic and may be negative in several years."

The new AG 49A permits the IUL illustration crediting rate to be 50 basis points higher than the policy loan rate. “This makes sense because it increases conservatism to the standard, which was previously 100 basis points,” Froment reasoned.

'Potential Downsides'

In addition, Birnbaum fought to apply the new illustration guidelines to inforce policies, which the committee rejected.

“The potential downsides of changing the rules for inforce illustrations outweighed the upsides," Froment said. "There were concerns that new illustrations of existing policies would create consumer confusion at best and insurance policy replacements at worst."

The background: 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 mandate: The IUL Illustration subgroup working on tightening AG 49 was thrown a curveball in October when the Life Actuarial Task Force sent this mandate to members: designs with multipliers or other enhancements should not illustrate better than non-multiplier designs.

The context: IUL sales are a source of strength for insurers. Overall total universal life new premiums increased 31% in the fourth quarter 2019, primarily driven by IUL products.

The next step: The new AG 49A now goes to the states for formal adoption through either legislation or publication by insurance departments, depending on each state's procedures.

Froment acknowledged that the changes to AG 49 might not be perfect, but represent a good start. The Life Insurance and Annuities Committee will be holding a call soon to discuss what additional regulatory steps might be needed, she added.

“While some may think that AG 49A is not perfect, it is clear to me that AG 49A represents incredible progress toward addressing significant issues in illustrations and it will have an immediate impact for consumers," she said.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.