NAIC Group Puts IUL Illustration ‘Multipliers’ Under Microscope

State insurance regulators debated risk and reward and how much of the former consumers should take on in pursuit of the latter when purchasing indexed universal life products.

A National Association of Insurance Commissioners' subgroup revealed the depths of  members' disagreement during its first conference call Tuesday on IUL illustrations.

The IUL illustration subgroup has a 2019 charge to "provide recommendations for modifications to AG 49 to the Life Actuarial (A) Task Force." The issue involves IUL multipliers, which did not exist when AG 49 was adopted in 2015.

AG 49 was developed to provide insurance carriers a more uniform method for calculating maximum illustrated rates on IUL products and to help consumers better understand index life insurance product illustrations.

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."

Companies are using index performance multipliers on IUL products in order to skirt this requirement, said James Regalbuto, deputy superintendent for life insurance at the New York Department of Financial Services.

"If you’re creating a product with these multipliers, or these bonuses, you’re not constrained by that 145 percent limitation on the options budget," he said.

Regalbuto urged the group to "look at whether these types of returns are even supportable based on the underlying economic theory of buying up, or charging the consumer more to buy a larger options budget, and then assuming long-term that you’re going to make all this money on these options relative to a fixed product that’s effectively got the same cost structure."

'Like A Bonus?'

At the other end of the spectrum, Rhonda Ehrens, chief actuary at the Nebraska Department of Insurance, questioned whether the multipliers are "like a bonus" that just needs to be better explained to consumers.

The two regulators sparred over whether a typical IUL policy with a couple years of zero returns will quickly lapse, as Regalbuto contended.

"What I think is even more nefarious here is when we over-illustrate the product ... through multipliers, the planned premium that consumers are making is going to be less than if they received a truer expectation of what the likely return of the policy is going to be," he said.

"We can all kind of recognize that products being sold today are being underfunded and I think there’s a real urgency to do something about that problem."

Ehrens disputed the notion that IUL policies are habitually lapsing after just a couple years of zero returns. If so, they were not sold correctly, or understood correctly by the consumer, she said.

"Maybe we need to address some disclosures and things like that a little bit more than just the calculations," she said. "And be sure that consumers understand that you don’t get the high end without the risk of the low end. The companies that I’ve talked to do not intend to have people lapse after two bad years of bad returns. They intend for people to wait it out."

Regalbuto again demurred. Customers understand the extremes, he said, and that an indexed-linked policy can offer incredible highs, or depressing lows.

The suppression of premium caused by the promise promoted by multipliers is a real problem, he reiterated.

"I agree that no company wants the product to lapse after a couple years, but there’s a lot of companies that would make a lot of money if the products lapsed a couple years before life expectancy," Regalbuto said.

Buyer Beware

The consumer must accept some responsibility for the product they are buying, other members said. Vincent Tsang, actuary for the Illinois Department of Insurance, suggested requiring one "optimistic" illustration, accompanied by a "pessimistic" one.

“At the end of the day, I think the policyholder should take some responsibility in what they are buying," he added.

The subgroup will be tackling IUL illustrations over many more calls in the coming months, said Fred Anderson, group chairman. The next call was set for the week of March 10.

To guide discussion, Anderson, acting deputy commissioner of insurance for Minnesota, put forth eight questions for the group to consider:

1. How should products with different attributes be illustrated to demonstrate the differences in product features, potential returns, and downside risk?

2. Should a higher risk / higher reward IUL product be illustrated with higher credited rates than a vanilla IUL product would be?

2a. If “yes”, how should the downside of the product be communicated with applicants? One example is a side-by-side alternate scale showing lower returns for the higher risk product than would be shown for a “regular” IUL product. Another example is a separate demonstration of how returns could develop in an adverse scenario (potentially impacted by the sequence of returns).

3. In 2015, there was a decision by the Subgroup to not have a hard ceiling on the credited rate, e.g., no rate above 6.75%. Should that decision be revisited?

4. Is the interaction of the loan charges and loan credits being illustrated as expected?

5. Are there known concerns regarding illustration of volatility-controlled funds?

6. Is there a concern that extreme variations of the index credit multiplier could lead to a risk-return profile similar to that of variable life even though return-of-premium (net charges and withdrawals) remains a floor? If so, is that something our subgroup, focused on illustrations, would address?

7. Should it be recommended that LATF address the issue of whether assumptions underlying IUL illustrations should be consistent with assumptions underlying PBR and asset-adequacy testing?

8. Are there issues relevant to IUL that are part of a broader concern related to non-IUL life illustrations, where engagement with A Committee may be necessary?

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.