NAIC Panel To Vote On AG 49 IUL Changes

By John Hilton

State insurance regulators are set to take an important vote Friday on rule changes designed to rein in indexed universal life insurance illustrations.

The Life Insurance and Annuities Committee will vote on language proposed by the American Council of Life Insurers to shore up Actuarial Guideline 49 and bring IUL illustrations more in line with actual returns.

But not everyone is happy with the proposed changes to AG 49. Birny Birnbaum, executive director of the Center for Economic Justice, submitted a lengthy letter to the life and annuities committee this week and is expected to speak forcefully against adoption.

Birnbaum challenged committee members to decipher and explain a 55-page IUL illustration from a leading insurer selling the product.

"If you, as Commissioner of Insurance in your states, cannot (explain the illustration), it should be evident that illustrations – used for selling life insurance products for which consumers transfer some or all of their savings in hopes of achieving future retirement security – are broken and need a major re-imagining and re-engineering to actually protect consumers."

Birnbaum urged the committee to reject the ACLI language in favor of a second proposal, known as the Independent Proposal, signed by a group of 13 people holding insurance, advisory and academic positions. That option was rejected in May by the Life Actuarial Task Force, which worked on AG 49 for about 18 months.

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: If the committee votes to accept the revisions to AG 49, they will go next to the National Association of Insurance Commissioners' Executive and Plenary Committee. The executive committee generally votes to adopt the work done by lower working groups.

Differing Strategies

Both the ACLI and independent proposals start with the same two values: net investment earnings rate and market cost of hedges. The independent proposal relies on the independent Black-Scholes methodology for determining the illustrated performance.

By contrast, 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.

In one of their last conference calls, the Life Actuarial Task Force members settled the in-force issue by voting 13-3 to affirm that any changes will only apply to new policies. Regulators also expressed an interest in doing something quickly, while conceding that problems might necessitate wholesale changes to AG 49 down the line.

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.