Will AG 49-B be a May Day or meh day for IUL illustrations?

By Steven A. Morelli

May Day has special significance for indexed universal life illustration rates as a new guideline goes into effect, which is expected to reduce illustrated rate and perhaps suppress sales.

As of May 1, the National Association of Insurance Commissioners’ Actuarial Guideline 49-B requires that index accounts cannot be illustrated above the benchmark index account and the maximum illustrated rate must include bonuses, according to Gregory Rohtstein, a Symetra assistant vice president who outlined the guideline during an NAIC webinar. The guideline also limits illustrated rates to a maximum of 145% of whatever an IUL portfolio is earning.

AG 49-B amends AG 49-A and in the latest NAIC attempt to rein in illustrations, particularly around uncapped volatility-controlled indexes with a fixed bonus. AG 49-B is seen as a patch until the NAIC reopens illustration regulation.

Lower rates may suppress IUL sales

Sheryl Moore, CEO of Wink Inc., said the lower illustrated rates are likely to suppress IUL sales up to 15%. IUL sales have been a bright spot in the industry, logging successive record years, even as many other life segments slump.

Modern Life, a tech-enabled life insurance brokerage that also participated in the NAIC webinar, took an early look at products on its platform and found that some illustrated rates are about two points or more lower, but most are remaining about the same. The firm fount the average difference between rates for products not tied to the S&P or which have multipliers and/or bonuses was 0.65%, while the average change for those tied to a standard equity index was 0.34%.

The firm said in an e-mail to advisors that the changes will mostly affect IULs underpinned by proprietary indices and not traditional S&P accounts.

“While this change won't affect the performance of the products themselves, the updated rates are likely to affect the way that customers understand illustrations,” according to Modern Life.

“Advisors who have outstanding applications or quotes will need to provide revised illustrations to their clients once carriers' deadlines have passed.”

New crediting method to come?

Moore said she suspects carriers will switch from portfolio crediting to new money crediting.

For life insurance products, companies tend to use portfolio crediting, which is based upon the yield on the entire product portfolio’s assets on the date that the product is purchased. Portfolio rates are typically slow to respond to interest rate fluctuations in the market environment.

For annuities, carriers use new money crediting, which is based upon the yield on assets that are available on the date that the product is purchased. New money rates are typically immediately responsive to interest rate fluctuations in the market environment.

“So, portfolio crediting would not give insurance companies time to adjust their rates quickly to reflect the current rate environment,” Moore said. “This is why we have seen annuity rates rise dramatically since 3Q 2022, but life rates have not risen much at all.”

The law firm Eversheds Sutherland said in a post that AG 49-A is the first of three steps.

“The amendments implementing the ‘quick fix’ to AG 49-A represent the first of a three phased effort by the IUL Subgroup to address concerns related to IUL Illustrations and life insurance and annuity illustrations more generally,” the firm said. “As AG 49-A is an actuarial guideline, most states do not have to do anything to implement the quick fix amendments and they will accept it without deviation. The second and third phases of the effort include consideration of targeted revisions to NAIC Life Insurance Illustrations Model Regulation (#582) (Model Regulation 582) or AG 49-A and recommendations for significant modifications to life insurance and annuity illustrations, respectively.”

In the NAIC webinar, Rohtstein said it will not be a quick process to fix IUL illustration excesses.

"That's a much larger undertaking than changing an actuarial guideline," he said. "We're talking probably two or three years minimum to rewrite that regulation. Things don't move fast in this industry. Certainly with something like this, we'll have a lot of voices, a lot of cooks in the kitchen, really to make sure that it gets done and done the right way."

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at stevenamorelli@gmail.com.