Task force weighs ‘limited’ revision of life insurance illustrations model

A state regulator task force announced Monday that it will review the rules governing indexed universal life illustrations — with an added twist.

The Life Actuarial Task Force opened a comment period on Actuarial Guideline 49-A, through Sept. 6 -- repeating a comment period just closed by Indexed Universal Life Illustration subgroup. LATF oversees the subgroup in the National Association of Insurance Commissioners' hierarchy.

But LATF added a twist to its comment period: "plus consideration of limited, targeted revisions to the Life Insurance Illustrations Model Regulation (#582)."

The overall life insurance illustration model regulation effort was an acrimonious process that took years before the NAIC adopted it in 1995. In the decades since, insurers have come up with various product features that have rendered illustration guidelines ineffective, consumer advocates say.

"The regulators are trying to patch leaks in a faulty infrastructure that consistently produces misleading information to consumers," said Birny Birnbaum, executive director of the Center for Economic Justice. "The current illustration regime permits insurers to 'illustrate' investments in ways not permitted for any other type of investment."

But regulators have been reluctant to reopen the overall illustrations model in recent years. Insurers would be "vehemently opposed" to reopening #582, Birnbaum said.

It "would be HUGE" if regulators reopened the illustrations model, wrote Sheryl Moore, president and CEO of Moore Market Intelligence and Wink, Inc., in an email. Indexed life insurance wasn't available yet when #582 was finalized, she noted.

Instead, 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.

New problems

Responding to the subgroup call for comments, Sheryl Moore of Moore Market Intelligence and Bobby Samuelson of The Life Product Review took the unusual step of co-authoring a letter outlining the problems with AG 49-A. The pair are competitors in the product intelligence field.

The Moore/Samuelson letter did not hold back on the need for immediate regulatory action. Some IUL fixed interest bonuses can generate illustrated income more than 60% higher than a base index such as the S&P 500, they wrote.

"This is, in our view, entirely inconsistent with the intent of regulators in crafting AG 49-A," the letter reads. "The gamesmanship currently occurring in illustrations is similar in effect and pervasiveness to the buy-up caps and multipliers that proliferated after AG 49 and resulted in AG 49-A."

Several insurers countered with comment letters to the subgroup, claiming that AG 49-A is succeeding in its goal. Allianz resubmitted its February comment letter defending its use of volatility controlled indexes (VCIs).

"Since February, the equity markets, bond markets, and therefore VCIs have generally performed poorly, but that does not materially change the content of the letter," said Austin Bichler in a cover letter. Bichler is assistant vice president and actuary for Allianz.

"These challenging market conditions highlight the protection inherent in IUL, while also demonstrating the additional value VCIs provide when combined with fixed bonuses," he wrote.

In the original letter, Bichler said that Allianz customers have received credits and other benefits that exceed the insurer's S&P 500 allocations.

'Address illustrations holistically'

Transamerica submitted a letter that endorsed reopening the overall illustrations model. The insurer also noted that it does not sell a product with an uncapped VCI and a fixed bonus -- the type of products critics claim are gaming AG 49-A.

"We can also support A Committee consideration of a longer-term, multi-year effort to overhaul illustrations for all fixed life insurance products, presumably involving the re-opening of the model," reads the letter from Andrew DeMarco, head of life solutions for Transamerica. "We believe such an effort should address illustrations holistically across products rather than taking a piecemeal approach."

The A Committee refers to the Life Insurance and Annuities Committee, which oversees LATF, and would vote to send any model changes to the NAIC Executive Committee for final adoption.

Birnbaum said a limited and targeted reopening of the model #582 "would not significantly address the fundamental problem with illustrations."

The request for comments asks writers to consider four options for AG 49-A:

(a) Attempt a quick fix on the current concern (some companies illustrating uncapped volatility-controlled policies better than capped S&P 500 policies) with a brief revision to AG 49-A; it can be discussed with A committee whether there are plans to address any broader issues with life illustrations;

(b) Make no changes to AG 49-A (allow current practices);

(c) Attempt to revise AG 49A more extensively to address the current concern and any other identified potential concerns; or

(d) Apply a hard cap on various IUL illustration metrics.

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.

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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.