IUL Illustration Rules Could Be Phased In Starting In Sept.
March 31, 2015 by Arthur D. Postal, arthur.postal@innfeedback.com
WASHINGTON – The National Association of Insurance Commissioners (NAIC) has moved a step closer to adopting new rules governing the illustrations to be used in selling indexed universal life insurance (IUL).
According to the agreement by the NAIC’s Life Actuarial (A) Task Force (LATF), the new rule could be approved as early as April 16 and could be phased in starting Sept. 15.
Under the proposed phase-in, provisions dealing with currently payable scale methodology, as well as the so-called “guardrail” that limits the expected yield that can be offered investors in IUL, will go into effect Sept. 15.
Provisions detailing information on policy loans and establishing additional standards will go into effect for all new business and in-force life insurance illustrations on policies sold on or after March 1, 2016.
The fly in the ointment is New York state. At a hearing held in connection with the NAIC spring meeting in Phoenix, the New York Department of Financial Services (DFS) voted to oppose opening the proposed final rule for comment. Further, the DFS said it intended to amend its current life illustration regulation, Regulation 74. New York DFS officials declined to comment.
Industry officials declined direct comment on New York’s decision, but several privately voiced dismay that the rule potentially could not have a uniform impact.
Industry actuaries regarded the only changes to the agreement as technical changes.
The LATF voted to expose the revised proposal for comment until April 14, with the goal of adopting it during its scheduled April 16 conference call.
At a two-hour meeting March 26, the LATF effectively approved in principle a proposed regulation that represents a compromise agreed to by interested parties March 20.
Under that proposal, agents would be allowed to show potential customers a document that supported crediting rates in the 6 to 7 percent range, although so-called “guardrails” mandated by the proposal could limit actual likely yields to as low as 4.5 percent. The proposal also puts limits on loan leveraging.
The LATF did agree to include two suggestions aimed at strengthening the final rule.
In the first suggestion, the Connecticut Insurance Department proposed language that would mandate additional disclosures. In the second suggestion, Alabama proposed an amendment that would further clarify the already existing obligations of the illustration actuary that deal with the parameters of the proposed index. The proposed amendment would specify that index parameters should include participation rate, cap rate, index load spread rate, index floor rate, index asset charge, and any policy expenses or index risk management charges in direct support of the index investment account that contribute to the calculation of the net index rate for the contract.
In addition, Alabama wants to include language intended to reduce ambiguity illustration actuaries might exploit through language in Section 8 of the exposure draft. The Alabama proposal also would impose sanctions on actuaries for using loopholes in rule language that lead to misleading interpretations of potential yield to those who purchase IUL.
Industry officials said they don’t think any of the proposed revisions “will materially change” the proposal.
Moreover, industry officials said that throughout the meeting, members of the LATF “were quick to ensure” that any suggested revisions to the proposal would not delay the adoption process.
The American Council of Life Insurers also proposed changes. Representatives of MetLife, Pacific Life, Allianz and New York Life also responded to LATF members request for input, according to several industry representatives.
