State regulator group previews possible ‘quick fix’ to IUL illustration issue

A state regulator group seeks public comments on three potential "quick fix" concepts to rein in indexed universal life illustrations.

The Indexed Universal Life Illustration Subgroup is pursuing  a "quick fix" to Actuarial Guideline 49-A to address concerns around the illustration of volatility-controlled indices. Simultaneously, the group is pondering a targeted reopening of the overall life insurance illustration regulation.

The subgroup opened a public comment period until Nov. 22 on potential revisions to the life insurance illustrations regulation #582. Re-opening #582 is a significant project, regulators agreed last week, and subgroup chairman Fred Anderson of the Minnesota Department of Commerce urged members to be specific in identifying long- and short-term corrections to the regulation.

Three concepts

For now, the group is accepting comments for three weeks on the following three concepts to fix AG 49-A:

• Bobby Samuelson noted that his proposal actually encompasses the thoughts expressed by several letter writers. Samuelson authored a pair of letters with fellow product intelligence analyst Sheryl Moore. They favor removing the lookback option from calculations. Their letter focused on three ways to accomplish this:

1. Use the Hedge Budget, which is already an element of AG 49-A, for each indexed account.
2. Use a Black-Scholes fair-market value of the currently offered index participation in each indexed account.
3. Use the offered Fixed Account rate as the maximum illustrated rate for all indexed accounts.

"I know we've kind of targeted it to these volatility control indexes, because that's what's most prevalent right now," Samuelson said of the general efforts. "But it may not be what's most prevalent in a year or two years. And that's part of the reason why we like getting rid of the look-back approach. Just focusing on a hedge budget creates more consistency across all available options."

• A concept put forth in a "six companies" letter would put a "limit on indexed illustrated rates of 145% of each indexed account’s hedge budget." The letter was signed by Allianz, John Hancock, Lincoln National, National Life Group, Pacific Life and Sammons Financial. This would extend the 145% limit on "assumed earned interest rate" set forth in AG 49.

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."

While this quick fix would not be a panacea, the insurers wrote, it is a good start.

"While this approach could still result in some index accounts illustrating slightly higher than the Benchmark Index Account," their letter reads, "it would quickly lower the illustrated values of volatility controlled indices and allow regulators and interested parties to begin a thorough analysis to determine the scope, approach, and implementation of a long-term solution."

• A concept by Securian Financial Group would add to a condition to limit the maximum amount of leverage illustrated to that of the benchmark index account.

"We're looking to address the uncapped volatility control indices and how they're illustrating in relation to benchmark indices," explained Brian Rock, actuary in Securian's Individual Life and Annuity Division.  "The way that we're looking to limit this is by adding an additional maximum for the index credits."

Although Rock acknowledged that the proposal is truly a "quick fix," it is one that "does a better job of bringing these back in line with the benchmark index."

The background

The NAIC adopted AG 49 in 2015, but insurers quickly got around it by offering IUL products with multipliers and bonuses. That led to AG 49-A, adopted in late 2020 after this LATF directive: "designs with multipliers or other enhancements should not illustrate better than non-multiplier designs."

In another key change, the IUL illustration crediting rate was set at 50 basis points higher than the policy loan rate. In AG 49, the crediting rate could be 100 basis points higher that the policy loan rate.

Still, what many consider to be unrealistic IUL illustrations continued.

For example, some IUL fixed interest bonuses can generate illustrated income more than 60% higher than a benchmark index account [such as the S&P 500], Moore and Samuelson wrote.

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.

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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 john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.