Regulators ponder how to tamp down annuity illustrations as high as 27%

Current annuity illustrations from top sellers show returns as high as 27% in one year, said Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce.

Slutsker noted the juicy illustrations Tuesday during the first meeting of the newly named Life Insurance and Annuities Illustrations Working Group.

Created at the National Association of Insurance Commissioners’ fall meeting in November, the working group will: "Evaluate concepts for improving life insurance and annuity illustrations and disclosures, and consider revisions to relevant NAIC models or develop other guidance where feasible and appropriate."

Tackling illustrations is sure to be a lengthy and difficult process, as illustrations have become a de facto sales tool for complicated life insurance and annuity products. Slutsker acknowledged the FOMO factor among life and annuity sellers.

“It's not just a few companies that are showing higher rates,” he explained. “If a company wants to compete in this space, they're put in a tough position. Because to just get those sales, they might be forced to show some of the higher illustrated rates just to compete with others.”

The working group exposed for 30 days a statement on illustrations asking, among other things, “what are both short term and long term approaches to ensure consumers receive reasonable expectations for index annuity investment returns at the point of sale?”

High illustrated returns

At the center of the discussion are indexed annuity illustrations that show high historical returns, often paired with downside protections such as a 0% floor in fixed indexed annuities, or FIAs.

Regulators said they have informally collected illustrations from roughly 25 to 30 of the top annuity market leaders. A preliminary review found that about one-third of companies showed highest illustrated annual returns of 10% or lower. The remaining two-thirds showed at least one product or index with illustrated returns above 10%.

Of those above 10%, roughly half fell in the 11% to 15% range, while the rest ranged from 16% to as high as 27%, Slutsker said.

Officials emphasized that the figures reflect the highest illustrated annual investment rates across products and indices for each company, not the rates shown for every scenario. Most illustrations also include guaranteed scales and less favorable scenarios, including years with zero returns.

However, regulators said the higher figures often reflect “recent history” scenarios, with even higher projections sometimes shown under more favorable assumptions. The returns cited include both index crediting rates and internal rates of return that factor in charges and cash surrender values.

Back-tested indices a focal point

Regulators said many of the highest illustrated FIA returns appear to rely on “back casting,” where recently created proprietary indices are presented as if they had existed for a decade or more.

In some cases, disclosures identifying an index as recently created appeared prominently in footnotes; in others, they were located deep within the illustration materials or not clearly identified at all, regulators said. Some indices were identified as new only after independent research.

Nearly all of the highest FIA illustrated rates reviewed involved back-tested indices, regulators said. By contrast, none of the indexed products structured as registered index-linked annuities, or RILAs, reviewed used back casting, Slutsker said, though some RILA illustrations still showed returns in the 15% to 20% range.

“Whatever's been going on has been misleading for many years, and there should be a limit on what they can assume is earned from the derivatives,” said Bill Carmello, chief life actuary for the New York State Department of Financial Services. “What we accepted on life side was way too much. It should be like maybe 10% higher than the normal earnings."

Consumer representatives and regulators raised concerns that consumers may focus on the higher illustrated returns while discounting guaranteed minimum scenarios.

Comparisons to securities rules

Participants also noted a disparity between annuity illustrations and those used in indexed life insurance. Current indexed life illustrations often show returns in the 5% to 8% range, regulators said, citing existing guardrails such as the existing illustrations model reg adopted in 1995, as well as Actuarial Guideline 49, which limit illustrated rates and methodologies.

On the annuity side, regulators referenced Model Regulation 245, which restricts illustrations for indices that have existed for less than 10 years, but noted that it has been adopted by only 10 states.

Some regulators pointed to federal rules governing variable annuity illustrations, including limits on hypothetical rates of return, and suggested the group review whether similar guardrails could apply in the fixed indexed annuity space. Others cautioned that indexed annuities differ structurally from securities products and that any regulatory approach should reflect those distinctions.

Broader questions about illustrations

Industry representatives said the proliferation of proprietary volatility-controlled indices has contributed to higher illustrated returns, particularly in the FIA market. With more than 200 such indices in circulation, many are relatively new and rely on back-tested data.

“We call them fake indexes,” said Larry J. Rybka, chairman and CEO of Valmark Financial Group. “Some of these indexes have actually returned zero in ’23, ‘24 and ’25, so talk about a bait-and-switch for consumers. I think that these need substantial reform in how they're illustrated.”

Consumer advocates raised broader questions about the role of illustrations, asking whether they are meant to explain how a product works or to project likely outcomes. Some called for research into how consumers interpret annuity illustrations and disclosures, particularly as more tools move online and can generate projections without an advisor present.

Other participants urged regulators to consider whether high illustrated returns are influencing not only accumulation expectations but also income riders and long-term care benefits embedded in some products.

Slutsker urged everyone to focus on ‘high-level” concepts.

“We’re really just looking to get the ball rolling,” Slutsker said. “We want to hear from all different perspectives and remain open-minded as we think through potential solutions.”

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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 [email protected]. Follow him on Twitter @INNJohnH.