NAIC regulators decline to move life illustration rework forward

Insurers have long gamed life insurance illustrations, critics say — Regulators are unsure about opening the life insurance illustration model at this time.

By John Hilton

A state insurance task force passed on a chance to endorse reopening the overall life insurance illustration model law, leaving the effort in limbo going forward.

The Life Actuarial Task Force met last week during the fall meeting of the National Association of Insurance Commissioners. During its two-day meeting, the panel declined to refer opening the life insurance illustrations model to its parent A Committee, or refer it to another group with expertise in illustrations, an NAIC spokesman said,

In response, consumer advocate Birny Birnbaum fired off a letter asking the NAIC to remove the illustration issue from LATF.

"LATF, despite their best efforts, has failed not once, not twice, but at least three times," Birnbaum wrote. "LATF’s failure is largely a result of trying to work within the framework of the Life Illustration model regulation – despite that regulation being developed and adopted before the introduction of indexed products – products that reference market outcomes instead of products that reflect insurer investment outcomes."

Creating the life illustration regulation was an acrimonious process that took years before the NAIC adopted it in 1995. In recent meetings, members of the Indexed Universal Life Illustration subgroup expressed concern that reopening the illustration model could lead to years of meetings and work to make any changes.

The subgroup operates under the direction of LATF.

Decisions on how to proceed with the life insurance illustration model law will return to the subgroup, which closed a comment period last month on "concepts" to improve the model. The subgroup received five comments.

'Quick fix' adopted

The supgroup did pass along a "quick fix" to Actuarial Guideline 49-A, tweaks that LATF approved by vote last week.

Actuarial Guideline 49 was adopted in 2015 to address indexed universal life products created after the original illustration model was adopted. Insurers quickly got around it by offering IUL products with multipliers and bonuses.

That led to AG 49-A in 2020 after this LATF directive: "designs with multipliers or other enhancements should not illustrate better than non-multiplier designs." But regulators and consumer advocates say the abuses continue.

LATF should not have opted to tweak the regulation once issues first arose, Birnbaum said. Doing so only pushed the problem into the future, he noted, where it has become a much bigger problem.

"For any other investment, consumers are told past performance is not a guaranty of future performance and backtesting is prohibited. AG49 doesn’t just permit such backtesting, it requires backtesting," Birnbaum wrote. "In addition to memorializing a discredited practice in consumer financial disclosure, each version of AG49 has prompted insurers to develop more complex and opaque product designs simply to game AG49 and continue to produce unrealistic illustrated accumulation values."

In addition, regulators only apply any changes to the actuarial guideline to new products. That creates "a bizarre situation in which consumers sold policies with now discredited illustrations will continue to get updated illustrations using the same discredited methodology," Birnbaum wrote.

At present, the subgroup has no meetings planned.

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.

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.