Product experts: Regulators need to end ‘gamesmanship’ of IUL illustrations

Roughly 18 months after new regulations meant to tighten up indexed universal life illustrations took effect, insurers are using “gamesmanship” to make a mockery of new rules, say two leading insurance product experts.

Sheryl Moore of Moore Market Intelligence and Bobby Samuelson of The Life Product Review took the unusual step of co-authoring a comment letter on Actuarial Guideline 49-A. The pair are competitors in the product intelligence field.

The Indexed Universal Life Illustration Supgroup held a short call last week to restart its discussion on the problematic IUL illustrations. Comprised of National Association of Insurance Commissioners' members, the subgroup called for comments to be submitted by today.

Regulatory action needed

The Moore/Samuelson letter did not hold back on the need for immediate regulatory action. Some IUL fixed interest bonuses can generate illustrated income more than 60% higher than a base index such as the S&P 500, they wrote.

"This is, in our view, entirely inconsistent with the intent of regulators in crafting AG 49-A," the letter reads. "The gamesmanship currently occurring in illustrations is similar in effect and pervasiveness to the buy-up caps and multipliers that proliferated after AG 49 and resulted in AG 49-A."

A spokesman for the American Council of Life Insurers said it would submit comments similar to the group's February letter.

"AG 49-A was designed to target multipliers and similar products and appears to have been successful in doing so," that letter reads. "If regulators believe the level of the illustrated values is unreasonable, we would ask regulators to provide clear objectives for a revised guideline."

The Background

Consumer advocates have long had IUL illustrations in their sights. Illustrations showing double-digit returns are often unrealistic and harm retirement savers, critics say.

Adopted in 2015, AG 49 failed to bring IUL illustrations in line, so the National Association of Insurance Commissioners adopted the subgroup's recommendations for AG 49-A late in 2020.

Insurers quickly got around AG 49 by offering IUL bonuses and multipliers. The IUL Illustration subgroup working on tightening AG 49 was given this mandate by the Life Actuarial Task Force: "designs with multipliers or other enhancements should not illustrate better than non-multiplier designs."

In another key change, the IUL illustration crediting rate was set at 50 basis points higher than the policy loan rate. In AG 49, the crediting rate could be 100 basis points higher that the policy loan rate.

New efforts to game AG 49-A are more troublesome, the Moore/Samuelson letter explained. Rather than increasing the option budget in order to augment illustrated performance -- what buy-up caps and multipliers did -- life insurers are now using essentially the opposite strategy, the letter said.

Three tactics cited

The Moore/Samuelson letter identified three tactics insurers are applying to new IUL illustrations:

1. Using indices with lookback-based illustrated option profits far in excess of the BIA;
2. Reducing the actual option budget so that the lookback rate for the non-BIA account matches the BIA; and
3. Deploying the savings in a fixed interest bonus that is added to the illustrated rate and loan arbitrage.

The net effect is an illustration far better than one produced by, say, the S&P 500, but one that "in the real world, will very likely perform worse," Moore/Samuelson wrote.

"Often, life insurers set these strategies as the default allocation in their illustration software in order to maximize their competitive positioning," the letter reads. "This is not what was intended by AG 49-A – nor is it beneficial for consumers or even defensible under the arguments put forth previously by industry.

"In our view, this latest variant of Indexed UL illustration gamesmanship is more aggressive and puts clients in a worse position than the previous attempts."

The IUL illustrations subgroup has not scheduled its next call yet.

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.

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