NAIC Panel Whacks IUL Illustrations; Industry Calls Time Out

The National Association of Insurance Commissioners creates model laws for states to pass.

State insurance regulators are trying to crack down on wayward indexed universal life insurance illustrations via an amendment to Actuarial Guideline 49.

The tentative change -- which still needs final approval -- would bar IUL illustrations with bonuses or multipliers from illustrating higher than IUL products without these features.

The Life Actuarial Task Force held a call last week to give direction to its IUL Illustration Subgroup on AG 49. During the call, LATF voted to add language tightening AG 49, which was approved in 2015.

This is the key change:

If charges that fund a Supplemental Option Budget are deducted from the illustrated cash value, then Indexed Credits generated by the return from the Supplemental Option Budget within the scenario being illustrated may be illustrated in an amount up to, but not exceeding, such charges.

Drafting note: The intention is to specify that designs with multipliers or other enhancements should not illustrate better than non-multiplier designs.

Dissatisfaction with AG 49 bubbled up not long after the guideline took effect. Almost immediately, new IUL products hit shelves with multipliers and bonuses that allowed for more attractive illustrations.

The highest IUL illustrated return Moore Market Intelligence recorded prior to AG 49 was 10.5%, said Sheryl Moore. There are current IUL products that show the cash values accumulating at rates as high as a 13.79% return, she said.

Moving Too Fast

The IUL Illustration Subgroup held a conference call today and heard from industry executives who say the changes won't work if loopholes remain.

In comment letters, industry representatives said regulators are moving too fast. The proposed language "appears to allow for the continued illustration of certain benefits related to charged-for indexed features, including multipliers," and for benefits related to buy-up indexed accounts, reads a letter from Scott R. Harrison.

Harrison represents Lincoln Financial Group, Pacific Life and Sammons Financial Group.

The subgroup agreed to expose AG 49 changes for another two weeks. Language could be finalized during a Nov. 14 call.

Next, subgroup members will need to decide whether new illustration language applies only to new policies, or to in-force policies as well. Regulators came down on both sides of that point today.

“I am for grandfathering the policies that have already been illustrated under the existing AG 49," said Rhonda Ahrens, chief actuary at the Nebraska Department of Insurance.

Others worried that if a fresh illustration of an existing policy looks worse in comparison to what the consumer expected, it could encourage them to lapse the policy.

At any rate, Birny Birnbaum, executive director of the Center for Economic Justice, said the issue has already been decided by NAIC precedent, which requires application to in-force policies.

“By grandfathering, what you would be doing is requiring companies to maintain multiple illustration systems," he added, which could be confusing for regulators as well.

The reasons for illustrations differ at different policy points, Moore added.

"Some of the reasons we’re talking about a revision of AG 49 right now is basically because of an illustration war in order to sell policies," she told the subgroup. "And those issues are not necessarily relevant for policies on an in-force basis.”

Loan Arbitrage Change

Overall, IUL is a significant bright spot in a sluggish life insurance market. New annualized IUL premium 4% in the second quarter and 7% year-to-date, according to LIMRA data. IUL sales represented 67% of UL premium and 24% of all individual life insurance premium in the second quarter.

Similar to an indexed annuity, an IUL policy's cash value growth is linked to a stock market index such as the S&P 500. The interest rate growth on IUL policies is generally capped at an upside number like 5% and a downside number of 0%.

Bonuses and multipliers give the client an extra annual boost in the credited interest rate. However, consumers are paying for that option.

Another change approved the LATF involved tightening the terms of IUL loans: If the illustration includes a loan, the total index credits to the policy loan balance shall not exceed the interest rate charged to the loan by more than 100 basis points.

For example, if the loan charge is 4% of the loan balance, index credits to the loan balance cannot exceed 5%, regardless of product features available.

All changes to AG 49 would require final approval of the NAIC Executive Committee and Plenary.

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.