On June 18, 2015, the Life Actuarial (A) Task Force of the National Association of Insurance Commissioner’s (NAIC) Life Insurance and Annuities (A) Committee adopted new Actuarial Guideline 49 governing indexed universal life (IUL) illustrations. The new guidelines are in response to overly aggressive marketing practices and are intended to make illustrations more reasonable. Despite insurance companies asking for a delay in implementation of this new Actuarial Guideline, it’s scheduled to become effective for all IUL policies sold on or after Sept. 1, 2015 and all new business and inforce on March 1, 2016.
NAIC Actuarial Guideline 49 was introduced to provide uniform guidance to IUL illustrations by:
- Addressing the obvious problem of using unrealistic index returns on illustrations;
- Limiting the policy loan leverage shown on illustrations; and
- Requiring additional consumer information to aid in consumer understanding
The NAIC acknowledges that this is just an interim guidance specifically for IUL illustrations, and on the April 16, 2015 conference call, they accepted that more needs to be done.
Mike Boerner, Chair of the Life Actuarial (A) Task Force said in a letter date April 27, 2015, “the Life Actuarial (A) Task Force will consider requesting approval from the Life Insurance and Annuities (A) Committee to open Model 582 to incorporate the changes specified in the guideline and to address similar issues in other product illustrations. Revising Model 582 will provide the opportunity for the Task Force to ensure that a level playing field for all product illustrations is attained.”
Lack of Uniformity
NAIC adopted the Life Insurance Illustrations Model Regulation in 1995. Since then, there’s been continued evolution in products and their design, including the introduction of IUL with benefits that are tied to an external index or indices. “Although these [IUL] policies are subject to Model Regulation #582, not all of their features are explicitly referenced in the model, resulting in a lack of uniform practice in its implementation. In the absence of uniform guidance, two illustrations that use the same index and crediting method often illustrated different credited rates. The lack of uniformity can be confusing to potential buyers and can cause uncertainty among illustration actuaries when certifying compliance with Model Regulation #582.”
Other guidance suggests practitioners should avoid relying solely on hypothetical illustrations and embrace proven and long/well establish Prudent Investor principles using research that independently measures policy charges and performance and provides documentation that the inforce policy and/or product being recommended is competitive and suitable relative to the universe of peer-group product alternatives.
In addition, comparing illustrations of HYPOTHETICAL policy performance can be “misleading,” are “strictly prohibited” by the chief regulatory body of the financial services industry are “fundamentally inappropriate,” according to a study by the chief actuarial body of the life insurance industry and “are subject to a high degree of fluctuation” and thus not reliable for determining the suitability of a given policy, according to the U.S. Office of the Comptroller of the Currency.
A Good Start
This new guideline is a good start to a long and overdue process for reigning in the life insurance illustration practices and educating the consumer on an essential financial product and should be considered together with emerging Best Practice Standards.