NAIC Nears IUL Illustration Path
February 10, 2015 by Arthur D. Postal, arthur.postal@innfeedback.com
WASHINGTON –The illustrations that insurers and advisors can use when selling indexed universal life (IUL) insurance continue to be the subject of discussion by a National Association of Insurance Commissioners (NAIC) task force. Its continuing effort to craft regulations that all interested parties can live with in regard to these illustrations will be the subject of a conference call Thursday.
Adding to the uncertainty about the issue of illustrations it that two competing industry groups have presented differing proposals on IUL regulations to the NAIC’s Life Actuarial (A) Task Force (LATF). One industry official said it’s possible that the LATF could put together its own proposal to be released to the public prior to Feb. 19.
The task force wants to finish this work in time for the full NAIC to approve the compromise proposal at its spring meeting in March in Phoenix.
One key issue that remains unresolved is how to calculate the maximum illustrated rate of return in IUL illustrations, according to a legal alert by lawyers at Sutherland, Asbill & Brennan. Another critical issue is the extent to which additional guidance should be provided in determining the assumptions used to demonstrate what illustrations are supportable.
Draft guidelines use a disciplined current scale based on a hypothetical historical look-back period of 25 years. These guidelines were prepared by the American Council of Life Insurers (ACLI) and supported by a group of nine insurers, including Pacific Life.
A competing proposal from a coalition of life insurers that does not support most aspects of the ACLI proposal uses an indexed derivative return to support the disciplined current scale, rather than a hypothetical historical return. Known as “the Coalition,” this group includes MetLife, Northwestern Mutual and New York Life.
One issue expected to be hotly debated is the degree to which the current low interest rate environment should influence a possible hard ceiling on the maximum illustrated rate. In other words, should rates above 7 percent be allowed in any situations for illustrations to be prepared for release on July 1, the targeted effective date for the guidance? Another area of great concern to both sides is whether any loan leveraging should be allowed to be included in the basic illustration, according to sources familiar with the issue.
In a statement submitted to the LATF by the IUL industry group, the nine insurers the group represents said that, “While we still stand behind the ACLI recommendation, we are willing to make some significant compromises to address concerns raised by LATF and the Coalition, believing it is in the best interest of the industry to reach an agreement provided the result maintains full and fair disclosure to consumers without unfairly disadvantaging IUL product illustrations.”
This group includes Accordia Life and Annuity, John Hancock, Lincoln Financial Group, M Financial Group, Pacific Life, Protective Life, RiverSource Life, Sammons Financial Group and Transamerica.
The nine insurers proposed creating a “new guardrail,” or a more conservative maximum illustration rate. This would be based on the S&P 500 using the 1-year annual point to point crediting method, 0 percent floor, 100 percent participation and that index’s current cap. It would use a “look-back methodology” that reflects the median return of all 25-year periods ending in a rolling 40-year time horizon, the group’s technical team said in a paper submitted Jan. 21.
In order to address concerns about consumer understanding of loans with leverage, the nine insurers’ technical group made an additional concession. Loans with leverage refer to policy loans where the interest charged on loans may be more or less than the interest rate credited on loaned values and/or the interest rate reflected in the dividend scale for such values.
To address this issue, the technical group proposed eliminating any positive loan leverage as part of the basic illustration ledger. However, they would allow loan leverage to be reflected on a supplemental illustration that would limit loan leverage to 200 basis points, require a sensitivity scenario using a parallel negative rate leverage, and include a minimum standard of disclosure about the risks associated with participating loans.
In its statement to the LATF in advance of the conference call, the Coalition made clear that it did not think its proposal for a “guardrail” creates “more onerous rules for IUL than other life products.”
The Coalition argues in its submission that, in general, “our suggestions are meant to clarify the application of certain sections within the Life Insurance Illustrations Model Regulation and ASOP 24 in a manner that is uniform across the industry and is generally consistent with the application for other products.
The only additional requirement, “over and above what is required for other products,” is the so-called “regulatory guardrail” on the investment return generated by indexed derivatives.
“This guardrail is meant to prevent overly aggressive assumptions underlying the disciplined current scale,” the Coalition said.
