NAIC takes another swing at stricter rules on life insurance illustrations

State insurance regulators are again nibbling around the edges of an actuarial guideline designed to limit unrealistic life illustrations.

Meeting in Minneapolis during the National Association of Insurance Commissioners’ summer meeting, the Life Actuarial Task Force discussed proposed changes to Actuarial Guideline 49-A.

Regulators are determined to limit their amendments to a specific section of AG 49-A to address insurers who are including “historical averages exceeding the maximum illustrated rate and backcasted performance,” as the amendment proposal form reads.

The illustration irregularities were uncovered after regulators reviewed illustrations from 13 companies, explained Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce.

“The disclosure that probably brought up the most concern is for companies that have indices that show historical returns for years before that index existed,” Slutsker said. “There's concerns over whether that could be back fitting already knowing what history is and it's being shown to the consumer, who may not see that. Even if there's markings, footnotes, or whatever it is, that just may not come across. [It] could look very optimistic to consumers.”

Approved in 2020, AG 49-A limits the maximum illustrated rate that insurers can use in policy projections to prevent unrealistic growth assumptions. It includes restrictions on exaggerated benefits from indexed loans, a strategy that previously allowed aggressive return assumptions.

Regulators found that insurers often displayed multiple historical averages over different timeframes, often side-by-side with the maximum illustrated rate, regulators noted. The historical averages were sometimes two to four times the maximum illustrated rate.

In addition to discouraging side-by-side comparisons, regulators aim to standardize the historical period for index components that lack 25 years of historical data. Regulators discussed setting the minimum historical period at five years, but some regulators objected.

Ten years is better than five years because it lessens the chance that an agent could only show a rosy positive result, said Wanchin Chou, chief actuary and deputy assistant commissioner in Connecticut.

'Systemic threat'

Consumer advocates, as well as law firms, have long had IUL illustrations in their sights. Illustrations showing double-digit returns are often unrealistic and harm retirement savers, critics say. Approved in 2015, AG 49 sought to tamp down illustrations with caps and other restrictions.

Insurers almost immediately got around AG 49 by offering IUL bonuses and multipliers. That led to AG 49-A and AG 49-B in 2023.

The task force exposed its changes for comment following the NAIC spring meeting. Larry Rybka, chairman and CEO of Valmark Financial Group, said indexed universal life abuses is a "systemic threat" to retirement security.

"The evidence is unambiguous: today's IUL illustrations create expectations that are
mathematically impossible to fulfill under real-world conditions," Rybka wrote in one of a handful of comment letters on the AG 49-A changes.

"Carriers routinely introduce proprietary indexes with no meaningful track record, illustrated using cherry-picked historical scenarios that would likely constitute fraud under securities regulations," he added.

The growth of proprietary indices is bothersome to many in the industry. At one time, the S&P 500 was used in almost all index products but came with limited ability to design product features. So, carriers created their own indexes and haven’t looked back.

Since then, more than 160 indices have been created. Unlike the S&P 500, few of them have any solid history to draw from.

'History' recreated

With no history to draw from to support illustrations, insurers created “backtested” hypothetical performance from proprietary index components. But critics say this results in misleading illustrations untethered from reality.

Mike Yanacheak is the chief actuary at the Iowa Insurance Division. Illustrations are overused by the industry and not appropriate in many cases, he said.

"I think we, at some point in time, need to ask the question whether or not it's appropriate to use history to create an expectation of future performance, because I think the answer is resoundingly a 'No,' " Yanacheak said. "But I think we need to ask that to see if there is any constituency in the industry that is willing to support that. If there is, then I want to hear it."

The task force re-exposed the amendment changes for comments on the five- or 10-year minimum history requirement for backtesting.

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