AG 38: The Death Knell For UL Guarantees?

By Michael C. Staeb

The Staeb Company, November 19, 2012 - Actuarial Guideline 38 (AG 38) was introduced in 2003 by the National Association of Insurance Commissioners (NAIC) and provides regulatory guidance on reserving requirements for insurer’s offering universal life (UL) products with secondary guarantees. Also called no-lapse guarantees (NLG), secondary guarantee provisions provide for continuation of coverage on universal life insurance products when cash value falls to zero, which in earlier UL products would have resulted in a lapse of the policy and loss of coverage for the client. AG 38 and its sister guideline, AGXXX, came about from conflicts between mutual and stock companies over reserving for NLG products and use of shadow accounts in pricing those products.

AG 38 was revised once before in July 2005. These latest revisions further clarify reserving requirements for secondary guarantee products. Why are these changes so significant? The revised reserving formulas that take effect January 1, 2013 not only impact newly issued policies but are retroactive, affecting all NLG policies issued since the previous revisions in July 2005.

While insurers have known additional changes were coming for two years the final revisions were not released until mid-September leaving little time to react before the 1/1/13 implementation deadline. Because of this short timeline do not expect exceptions to transition rules, or issued-paid-delivered by deadlines.

Impact on Existing Policy Holders

It is likely that the crediting rates and cost of insurance/expenses (COIs) on inforce NLG policies will continue to their march towards their guaranteed minimums and maximums. More importantly your clients who are currently contributing at lifetime guarantee premium levels will see no change in that premium or the guaranteed death benefit.

Impact for New Clients

Beginning January 1, 2013 most NLG products issued will have significantly higher premiums than today’s version of the same product.

We have yet to see how far reaching these revisions will be but a significant number of insurers have announced pricing changes. Most of the increases are in the double digits. Genworth has done market research on these increases which are attributable not only to AG 38 but also the continued low interest rates. As you can see the results are dramatic.

More drastic measures have been taken by at least one carrier so far. The ING Companies are “temporarily” exiting the no-lapse guarantee market effective January 1, 2013. See links below to many carriers’ announcements.

The Bottom Line

Back to the title question, in short the answer is no, NLG is not going away. But AG 38’s recent revisions have significant repercussions for the future of no-lapse products. As for what happens beyond the first of the year, I predict we’ll see a couple more carriers exit the secondary guarantee market but no vast exodus. The value of no-lapse guarantees to clients, particularly in estate planning is far too important for such a product to go the way of the dodo. However this is certainly not the end of pricing increases. As long as interest rates remain low, the national economy and global markets remain weak and volatile, this will continue to be the new norm.

Carrier Announcements on AG 38:

American General Life

AG 38 News Update(11/05/12)

AG 38 News Update(10/11/12)

American National

AG38 - ANICO is ready(10/24/12)

Aviva Life and Annuity Company

Aviva announces NLG product changes to comply with new regulatory guidelines(10/22/12)

Aviva announces life product changes effective Oct. 1(08/31/12)

Aviva Life and Annuity Company of NY

Aviva re-launching NLG products December 10(10/22/12)

Banner Life