IUL Illustration Rules Clash at NAIC
November 16, 2014 by Arthur D. Postal
WASHINGTON — An NAIC task force wants to have a compromise regulation on the illustrations insurers and agents can use in marketing indexed universal life insurance (IUL) ready for task force action at the spring NAIC meeting in late March.
The call for compromise came after conflicting testimony on a proposal from the American Council of Life Insurers. Some said the ACLI proposal addressed concerns over illustration accuracy, others said the proposal would allow illustrations that have only a 10 percent likelihood of being accurate.
Regulators plan to establish guidelines that can be used to craft a compromise by late December, and all parties will have until early March to present a unified proposal to the task force.
The ambitious schedule for action on interim guideline for IUL marketing was established Saturday at a three-hour meeting of the Life Actuarial (A) Task Force at the NAIC fall meeting, now under way in Washington, D.C.
Task Force Chair Mike Boerner, an actuary with the Texas Insurance Department, acting for the commissioner, said the guidance governing illustrations will only be an interim step, with the task force then opening up the basic life insurance illustration model law for revision as a long-term goal.
Boerner acted after the task force rejected a request from a group of companies to adopt an illustration proposal from the American Council of Life Insurers. He instead wanted a compromise between the proponents and opponents of the ACLI proposal.
IULs are primary products for a number of companies, and at the same time a source of concern to some large companies because the products are complex and could potentially create image problems for the industry in the future. Another factor was that the meeting room on Saturday was standing-room only, reflecting widespread industry interest in the issue.
Besides concerns voiced by the three large companies, New York Life, Metropolitan Life and Northwestern Mutual, Mark Birdsall, deputy insurance commissioner, also weighed in on the decision.
Birdsall said the illustration proposal drafted by the ACLI doesn’t address the two most important issues regarding IUL illustrations as he sees it.
“To my mind, the ACLI proposal does not do an adequate job of describing, giving actuary guidance, on how to set the illustrative credit rating.” He added that “while disclosure is certainly an important issue, [the ACLI proposal] does not address the heart of what we are concerned about in this issue, and that is the common sense use of illustrations for policyholders to make decisions.”
The task force is planning a conference call on Dec. 11 following an interim meeting of regulators Dec. 5. If the regulators’ guidance can’t be approved by the conference call, a second meeting will be held Dec. 18, Boerner said.
Robert J. Ehren, senior vice president, life products manufacturing, for Minnesota Life Insurance Co. and Securian Life Insurance Co, St. Paul, Minn., advocated for adoption of the ACLI proposal.
He said it is a “gigantic step forward with regards to consumers. It is not perfect, but it is a compromise and a huge step forward.” He said it “solves 90+ percent of the issues we see today” with regard to the IUL illustrations issue.
However, Gregory A. Gurlik, senior actuary with Northwestern Mutual, speaking on behalf of Northwestern, New York Life and MetLife, cautioned that if the IUL product doesn’t meet the long-term expectations of consumers, “the industry will be painted with a very broad brush.”
And, a New York Life comment letter on the issue last month said its analysis concludes that “the ACLI proposal would produce illustrated values that have a less than 10 percent probability of being achieved over the long term.”
The guidelines crafted by the regulators before year-end will set the stage for interested parties to craft a single, compromise proposal, for the NAIC task force to consider at the spring meeting.
Those guidelines will be drafted over the next several weeks by regulators based on an outline proposed by Fred Andersen, a life actuary with the Minnesota Insurance Department. Among those assisting will be officials of the American Academy of Actuaries.
Andersen said both sides to the debate “have valid arguments, and a compromise needs to be developed.”
Principles that should be included, Andersen said, are a national index of credit rates no more than 1¼ to 2¼ percent higher than traditional universal credit rates; prominent side-by-side mid-point comparisons; the relationship between policy loan rates and credit rates “that addresses a problem there.”
He said the regulators “need to consider” whether a “passive simulation that would not be displayed in illustrations but it would be in background would help determine a credit rating.”
At the same time, Andersen said he would remain flexible as regulators work on the guidelines. “I am not closing the door on any [compromise] approach,” and acknowledged that the expertise of industry officials, i.e., actuaries, would be needed.
The ACLI developed its illustration package after identifying certain goals the illustration should meet, and then developing illustrations that conform to those guidelines. One of the goals, the ACLI said, is to create “consistency in determining illustrated rates for similar IUL products.”
In comments to the task force, the ACLI said its proposal meets these goals because policy values are illustrated at two nonguaranteed interest rates in addition to the guaranteed rate in order to highlight the likelihood of variability of returns; a table of historical index rates is provided to highlight year-by-year variability of returns; and because a table of historical averages based on different index parameters is provided to highlight variability of nonguaranteed elements and the impact to credited rates.
Among the supporters of the ACLI proposal is Pacific Life, the largest underwriter of IUL products.
Ehren, of Minnesota Life and Securian, said in supporting the ACLI proposal that “I think we all agree that is in the industry’s and the consumer’s best interest to provide additional disclosure and education” about the products we offer in the IUL market.
He said the ACLI approach “solves a vast majority of the illustration issues,” and is comprehensive in addressing all the various types of universal-type products. “It is a gigantic step forward; the right approach to use history.”
Arthur D. Postal has covered regulatory and legislative issues for more than 30 years in Washington, D.C. He can be reached at arthur.postal@innfeedback.com.
