Regulators tackle troubling illustration practices

State insurance regulators say some life insurers are “undermining” efforts to bring illustrations in line with reality.

The Life and Annuity Illustration Subgroup aims to stop the latest illustration abuses with changes to Actuarial Guideline 49-A. Subgroup members discussed the problems March 22 during the opening day of the National Association of Insurance Commissioners’ spring meeting.

The illustration abuses were uncovered after an informal multi-state review group was formed and selected 10 companies to review in 2024, explained Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce.

Regulators found very high compliance with various AG 49 rules, Slutsker said, with one exception with disclosures under AG 49-A.

Approved in 2020, AG-49-A limits the maximum illustrated rate that insurers can use in policy projections to prevent unrealistic growth assumptions. It includes restrictions on exaggerated benefits from indexed loans, a strategy that previously allowed aggressive return assumptions.

The review group found “multiple insurers” showing a second illustrated table in defiance of the regulation, Slutsker said.

“And it would be like a side-by-side comparison, which we thought, not even implicitly, but almost explicitly, just trying to say, ‘Yeah, that's the maximum we can do. But actually, it's higher, and it probably will be higher for you,’” Slutsker said. “We felt like it was kind of undermining some of the requirements because of that.”

Longtime illustration concerns

Consumer advocates have long had IUL illustrations in their sights. Illustrations showing double-digit returns are often unrealistic and harm retirement savers, critics say. Approved in 2015, AG 49 sought to tamp down illustrations with caps and other restrictions.

Insurers almost immediately got around AG 49 by offering IUL bonuses and multipliers. That led to AG 49-A and AG 49-B in 2023.

The proposed amendments include language banning the comparison of historical returns with the maximum illustrated rates allowed by AG 49-A. Other language tightens up how historical returns can be presented and increases the historical data period from 20 to 25 years.

“For any Index Account where an index or indices have existed for fewer than 25 years, the historical period shall be limited to the length of its existence, or the date of inception of the index,” one key language addition reads.

The growth of proprietary indices is bothersome to many in the industry. At one time, the S&P 500 was used in almost all index products but came with limited ability to design product features. So, carriers created their own indexes and haven’t looked back.

Since then, more than 160 indexes have been created. Unlike the S&P 500, few of them have any solid history to draw from.

With no history to draw from to support illustrations, insurers created “backtested” hypothetical performance from proprietary index components. But critics say this results in misleading illustrations untethered from reality.

Tomasz Serbinowski, an actuary with the Utah Insurance Department, said regulators “need to get away from” allowing any illustrations based on past performance. It “incentivizes” the company to pursue creative historical results, he argued.

The Life and Annuity Illustration Subgroup plans to begin meetings on the illustration issue in the coming weeks, Slutsker said.

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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.