Rift Splits Over ACLI’s AG 49 Proposal

By John Hilton

UPDATE: At 1 p.m. today, LATF announced a public comment period on the Independent Proposal. Comments will be accepted until May 27 and can be sent to Reggie Mazyck at [email protected].

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A wide rift opened Thursday among industry and consumer factions over changes to indexed universal life illustration rules, with anti-trust charges lobbed at the American Council of Life Insurers.

The acrimony dashed plans by state regulators to reach a consensus on language changes.

Minnesota regulator Fred Anderson planned as chairman to use the 90-minute call by the Life Actuarial Task Force to forge ahead on new language to Actuarial Guideline 49. That language was submitted by ACLI.

That plan met immediate resistance from Bobby Samuelson, former insurance company executive, and Birny Birnbaum, executive director of the Center for Economic Justice.

An NAIC-supported consumer advocate, Birnbaum expressed the concern that ACLI was "engaging in anti-trust violations because it was acting as a mechanism for insurers to collaborate on regulatory guidance directly related to product designs."

The ACLI said the anti-trust claim did not have merit and did not help the process.

"Baseless claims contribute nothing to the important discussion of how best to help consumers make informed decisions through proper and strong regulatory oversight," said Whit Cornman of ACLI, adding that the task force requested ACLI's input.

"It is both appropriate and lawful for the industry to give regulators its thinking on the development of laws and regulations," he added. "In a fully transparent process, LATF [the task force] exposed the proposal for review, inviting public comment from consumer groups, regulators and industry, and the NAIC will have the final word on any changes to AG 49."

Birnbaum and Samuelson support an alternative "Independent Proposal" that Samuelson claimed can solve AG 49 issues for good.

"The ACLI proposal manages to simultaneously make illustrations less transparent and less consistent, a combination that renders them almost unintelligible except to the company issuing the product," said Samuelson, executive editor of Life Product Review.

The background: AG 49 was adopted by the National Association of Insurance Commissioners 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 LATF 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.

ACLI Language

During previous calls, Chairman Anderson warned industry representatives that new language should focus on keeping illustrated values in the 6-7% range. The subgroup settled on language submitted by ACLI, which was put out for public comment earlier this year.

"We went section by section looking at the language that we felt best met the decisions of the regulators and in the view of the experts on our group to be the most implementable," said Brian Bayerle, senior actuary for ACLI.

Samuelson disagreed, claiming the trade association language merely splits the illustrated rate into two segments, one of which illustrates with hedge valuation arbitrage and one that does not.

"This segmentation of the illustrated rate is both incongruous with the original letter and spirit of AG 49 and entirely artificial, created for the sole purposes of fulfilling the LATF mandate," Samuelson said. "This is why the ACLI proposal is so cumbersome, complex and opaque."

In order to create an artificial bifurcation of illustrated indexed credits and implement different solutions for each, "nearly every clause in AG 49 had to be modified in some way, including the introduction of new definitions, formulas and clauses," Samuelson said. Fifty-one of the 61 clauses in AG 49 were modified by the ACLI proposal, he said.

Beyond the details, Birnbaum questioned why the NAIC is allowing the industry to write rules governing its own conduct.

"If AG 49 is too complex for LATF members to understand or revise, then it is clear that AG 49 is not a viable regulatory tool and needs to be revised to make it manageable by regulators – not made even more complex and less transparent and unaccountable to regulators and consumers," he said in a followup letter today.

"I think most people would acknowledge that this is a different issue than issues LATF typically deals with," Anderson said. "There have been votes that have gone against what a lot of the companies wanted."

Alternative Proposal

Alternative language, known as the Independent Proposal, signed by a group of 13 people holding insurance, advisory and academic positions has not been seriously considered or put out for comment. That also rankled Birnbaum, who called on the task force to put it out for comment.

"Such an exposure does not slow the ongoing revisions to the ACLI proposal and will permit a deeper review of the IP [Independent Proposal] that will reveal the advantages compared to the ACLI proposal," he said.

The IP is a simple, straightforward fix that will eliminate the need to debate AG 49 in another few years, Samuelson said. It requires that the illustrated value for the hedges be calculated in a way that aligns the actual market price of the hedges with their illustrated value, he explained.

"This will eliminate the possibility for any sort of illustrated valuation arbitrage in the Indexed UL illustration," he said, "including excess interest from multipliers and buy-up caps."

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.

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.