New IUL Illustration Rules Will Not Apply To In-Force: Regulators

By John Hilton

A state regulator task force took another step Thursday toward agreement on rule changes designed to rein in index universal life insurance illustrations.

In another "straw poll" vote, Life Actuarial Task Force members buried the in-force issue by voting 13-3 to affirm that any changes will only apply to new policies. Illinois, New York and California regulators voted against.

The task force is considering language proposed by the American Council of Life Insurers to shore up Actuarial Guideline 49 and bring IUL illustrations more in line with actual returns. Members are racing the clock to present a proposal for adoption by its parent A Committee during the committee's July 10 call.

The vote followed a spirited debate during which Birny Birnbaum, executive director of the Center for Economic Justice, repeatedly pressed regulators on the logic of illustration changes that exclude existing policies.

"We don’t understand why you would go to the trouble of saying 'We want to fix the problems of AG 49,' but to the consumers who have already purchased the product, they shouldn't get the benefits," Birnbaum said.

Industry representatives claim it would confuse consumers to receive new illustrations that might be drastically different.

The background: AG 49 was adopted by the NAIC in 2015 to rein in IUL illustrations that were showing consumers unrealistic returns. Critics say insurers almost immediately got around the new rules by offering IUL bonuses and multipliers.

The mandate: The IUL Illustration subgroup working on tightening AG 49 was thrown a curveball in October when the Life Actuarial Task Force sent this mandate to members: designs with multipliers or other enhancements should not illustrate better than non-multiplier designs.

The context: IUL sales are a source of strength for insurers. Overall total universal life new premiums increased 31% in the fourth quarter 2019, primarily driven by IUL products.

'It's Nonsense'

Applying illustration changes to old policies would create a lot of potential confusion, on replacement policies, for example, said Brian Bayerle, senior actuary for ACLI. Consumers could end up seeing something completely different from an illustration that was appropriate when the initial policy was purchased, he explained.

"I don’t necessarily think we ended up with [AG 49 changes] that industry loves," Bayerle said. "I think we have a policy that industry can live with. We do think the best path forward is to apply this to policies on a going-forward basis."

In addition, the costs associated with applying new illustration guidelines to in-force policies might be very costly to insurers and consumers, noted Teresa Winer, actuary with the Georgia Office of Insurance.

But Birnbaum remained incredulous.

"It’s nonsense," he said. "How can somebody claim with a straight face that a consumer is going to be confused by getting better information than they got previously?"

Loan Interest Crediting

The biggest remaining issue for the task force is to decide between two options for establishing a policy loan interest credited rate. ACLI presented two options:

Members also produced a third option that combines option one language with a reduction of the permissible loan arbitrage from 100 to 50 basis points.

The task force is accepting comments on the three options by email to Reggie Mazyck at RMazyck@naic.org by June 12.

"We just have to start making decisions," said Fred Anderson, deputy commissioner of insurance for Minnesota.

Anderson chairs the IUL Illustration Subgroup, which has discussed amending AG 49 for close to 18 months.

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.