NAIC task force recommends 10-year data history for index illustrations

A National Association of Insurance Commissioners task force agreed Thursday to recommend that 10 years of historical data be required to illustrate index components.

The recommendation defied industry lobbyists who preferred the change to Actuarial Guideline 49-A be set at five years of history. The change, along with editorial corrections, was adopted unanimously by the Life Actuarial Task Force.

The guideline changes will now go to the Life Insurance and Annuities Committee for approval and then to the NAIC Executive and Plenary Committee for a vote.

Regulators set out earlier this year 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 indexed life illustrations from 13 companies.

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.

'More appropriate'

In addition to discouraging side-by-side comparisons, regulators aimed 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. Those objections continued Thursday.

Craig Chupp of Virginia, vice chairman of the task force, noted that 10 years is the standard for indexed annuity illustrations.

“I believe a typical business cycle, it's probably more like between five and 10 years,” Chupp added. “To be on the safe side to capture a full business cycle, I think 10 years is more appropriate.”

Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce, explained a "slight preference for five years."

"For really active funds, there are instances where there's three or four years that you see very favorable performances. I do think that usually by year five it starts to be enough information," Slutsker said. "But I don't necessarily believe that increasing the years indefinitely is just beneficial to consumers."

The American Council of Life Insurers also lobbied for five years and submitted the lone comment letter.

"We continue to support the concept of there being no minimum to the historical period," said Colin Masterson, senior policy analyst for the trade group. "We would prefer five years as the minimum to provide policyholders critical information to understand the differences between indices available to them."

Chronic index illustration issues

Consumer advocates, as well as law firms, have long had indexed universal life 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 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.

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.

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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 john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.