Consumer advocate Birny Birnbaum pushed a state insurance regulator committee to overhaul illustration rules Tuesday.
The Life Insurance and Annuities Committee gave Birnbaum 20 minutes to make the case for new illustration rules. The committee, part of the National Association of Insurance Commissioners, considers model laws to govern insurance, which are then available to states for adoption.
The overall life insurance illustration model regulation 582 was an acrimonious process that took years before the NAIC adopted it in 1995. In the years since, insurers have come up with various product features that have rendered illustration guidelines nearly useless, Birnbaum claimed.
"Illustrations obscure instead of explaining the operation of the policy," he said on a conference call. "Illustrations in advertisements presenting misleading information about the risk and return."
And the fault lies not necessarily with the insurer or the agent, said Birnbaum, who began by stating the life insurance and annuities "can and should play a major role in consumer financial and retirement security."
However, "it's a regulatory framework that encourages these poor consumer outcomes," he added.
Much of the controversy centers on proprietary indexes developed by insurers. Some of these indexes are comprised of various financial instruments and come with historical returns that critics say bear little relation to reality.
Five Changes Proposed
Birnbaum suggested the NAIC consider five goals for future studies of illustration regulation:
Simpler explanation about how the product operates. Some product disclosures are dozens of pages long, too long for consumers to read and comprehend, Birnbaum has said. The industry can do a better job communicating what a product does and the downsides.
Apples-to-apples comparison of product accumulation with alternative investments. One example of "misleading" comparisons, Birnbaum said, is when insurers compare their proprietary indexes to S&P 500 returns, but fail to account for dividends that are reinvested along the way.
"An investment in the S&P 500 would have been several percentage points higher because of dividends," he noted.
"Data mining" to produce the best-projected historical returns is another issue, one that Birnbaum called "profoundly anti-consumer."
Show the cost and value of insurance. "With auto insurance, I see the premium costs for coverage to replace my vehicle if it's totaled," Birnbaum noted. "With term life insurance, I see the premium costs for coverage to pay a death benefit if I die. But with index life and annuity products, including the new buffered variable products, a consumer cannot see the insurance value proposition."
Birnbaum proposes a document listing the value of insurance and what it "costs" the consumer when compared to investing the same money in the market.
"This does two things," he explained. "One, it sets better expectations for consumers. But just as important, it reinforces the fact that the consumer is buying insurance."
Show meaningful measures of risk and return. Birnbaum proposed a simple six-column chart to show the product and five different return levels: ranging from a 15% increase in an index to a 15% decrease in an index.
Doing so gives the consumer a clear idea of best- and worst-case scenarios.
Set realistic expectations for policyholders. As part of the overhauling illustrations and setting realistic expectations for consumers, Birnbaum proposed the following actions to regulators:
- Consumer testing to verify consumers are not misled or deceived
- Encourage product and insurer competition and discourage illustration competition
- Discourage product design to juice illustrations
- Prohibit backtesting for periods the index has not been in existence
- Prohibit index providers from providing the hedging program to support the product using that index
- Prohibit indexes that are not transparent and allow the consumer to independently verify the stated results
- Finish life insurance policy overview work and create similar policy overview for annuities
- Provide buyer’s guide and policy overview prior to purchase
NAIC Not Ignoring Illustrations
Iowa Insurance Commissioner Doug Ommen made the only comments responding to Birnbaum's presentation. The NAIC has pushed out a regulation, so far, adopted by just a handful of states, to limit the illustration of indexes in existence less than 10 years, Ommen noted.
In addition, the executive committee recently adopted Actuarial Guideline 49A, approving changes designed to tighten up indexed universal life illustrations. The new guideline is meant to prevent IUL products with multipliers and bonuses from illustrating at a better rate than IUL products without them.
During the August meeting to adopt AG 49A, regulators conceded that it was not a perfect solution and vowed to continue monitoring illustrations for evidence of further regulation.
Birnbaum proposed these next steps:
"We urge re-engineering of the illustration regimes not just to improve consumer protection, and consumer confidence in the insurance products, but to create a more level playing field with similar rules for similar product features," Birnbaum said.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at firstname.lastname@example.org. Follow him on Twitter @INNJohnH.
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