Insurance regulators hosted a vigorous debate Monday on whether juiced-up indexed universal life products are projecting realistic returns or not.
New IUL products featuring "multipliers" or "bonuses" prompted the IUL Illustration Subgroup to consider changes to Actuarial Guideline 49. The National Association of Insurance Commissioners' subgroup has held several conference calls on the topic.
"We have consumers out there being misled by these illustrations," said James Regalbuto, deputy superintendent for life insurance at the New York Department of Financial Services. "They’re fixed life insurance products showing rates of return that rival securities and I think we fail to appreciate how defective AG 49 is currently. None of the assumptions that underpin AG 49 really hold any water."
Regalbuto called for "a total rework of AG 49 from the ground up." AG 49 was finalized in 2015 to provide insurance carriers a more uniform method for calculating maximum illustrated rates on IUL products.
The overall life insurance illustration model regulation #582 was a very lengthy, acrimonious process that took years before the NAIC adopted it in 1995. Questioned by subgroup chairman Fred Anderson, acting deputy commissioner of insurance for Minnesota, Regalbuto said he is not advocating re-opening the overall illustration model.
'Less Than 30 Days'
Multipliers and bonuses are relatively new on IUL product shelves. In fact, "The very first multiplier to be introduced on an indexed life product was launched after AG 49 was proposed, but less than 30 days before it was put into action," said Sheryl Moore of Moore Market Intelligence.
"The existence of multipliers has accelerated dramatically since that point," said Moore, adding that she is not opposed to the concepts as long as everyone understands how they work.
But the highest IUL illustrated return Moore recorded prior to AG 49 was 10.5%. There are current IUL products illustrating a 13.79% return, she said.
Overall, IUL is a significant bright spot in a sluggish life insurance market. New annualized IUL premium grew 9% in the first quarter -- the 10th consecutive quarter of growth for the product line.
Similar to an indexed annuity, an IUL policy's cash value growth is linked to a stock market index such as the S&P 500. The interest rate growth on IUL policies is generally capped at an upside number like 5% and a downside number of 0%.
Bonuses and multipliers give the client an extra annual boost in the credited interest rate. However, consumers are paying for that option.
Scott R. Harrison, who represents insurers such as Lincoln Financial and Pacific Life, emphasized that multipliers were not part of the AG 49 discussions.
"So the focus of our discussions now should be how to have multipliers incorporated into AG 49," he said. "We think that effective disclosure is where the action is on this. Let’s move forward in a way to simplify disclosure."
Many participants on the call agreed that a big problem is whether consumers understand how multipliers work. Many agents don't even understand the concepts, Moore said.
"I am working with insurance agents and not one of them that I’ve spoken with in the past year understands that a product with a 6% illustrated rate and a 55% multiplier is effectively illustrating at 9.3%," she explained.
"They don’t understand that and they’re not contemplating doing the math because most products have one value in the field for the illustrated rate and another value in the field for the multiplier."
Tricks Or Treats?
Late in the conference call, consumer advocate Birny Birnbaum expressed disbelief in the whole multiplier/bonus concept.
"The idea is that I’m going to (get) a 5, 6, 7% better return for the life of the product over a product that doesn’t have a multiplier? That simply doesn’t make any sense in this context.
"If you’re looking at a 30-year horizon, there’s no possible way that this multiplier product can outperform a product without the multiplier. The charges that are associated with it have to offset any increased performance. Because if they don’t, then there’s an arbitrage possibility."
The charges are going to be invested in things such as derivative packages, for example, so when the market goes up, they will provide higher returns, Anderson countered.
"I think the product works," he said. "It creates kind of a niche in a different part of the risk-return spectrum than a traditional IUL does. But that doesn’t diminish the fact that there are many issues that need to be addressed."
The subgroup will meet next Aug. 2-5 at the NAIC Summer Meeting in New York City. Members are working through a list of 23 items, separated into two groups: disclosure-related and beyond disclosure.
AG 49 states that: "If an insurer engages in a hedging program for index-based interest, the assumed earned interest rate underlying the disciplined current scale shall not exceed 145% of the annual net investment earnings rate."
Deciding whether to expand what policy assets can accumulate at 145% is "probably the No. 1 decision for this group," Anderson said.
"That’s what I’m hoping we can come to a decision point at the upcoming national meeting," he added.
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.