Vapor on paper: Coming to an annuity near you
April 28, 2013 by Sheryl J. Moore
The insurance division in the great state of Iowa (a.k.a. the indexed annuity capital of the world) will soon set forth a new regulation on annuity illustrations. This regulation, a directive that I’ve aided in crafting for nearly eight years, will actually hamper my company’s ability to make money.
Illustrations ‑ lengthy documents that are generated by specialized software ‑ project how an insurance contract may perform over a period of time. These projections actually provide a year-by-year demonstration of how the insurance contract’s guaranteed minimum values will perform on a worst-case scenario basis, as well as how the non-guaranteed (current) values might perform on a best-case scenario basis. Seem like I’m a little bearish on illustrations? I have good reason to be.
My career in the insurance industry began nearly 15 years ago and one of my first responsibilities was servicing orphaned Universal Life insurance policies that had been sold with illustrations showing 12 percent crediting rates. Translation: life insurance policies that no longer had agents servicing them, where the credited rate had dropped to the minimum, a whopping 8 percent decline over a period of 10 years or so (never mind that the insurance charges had often escalated conversely, further compounding the problem). Usually the customers that I spoke to were nearly elderly, often on fixed incomes, ill to the point that they were no longer insurable, and in a position where they were going to be forced to pay thousands to keep their life insurance, or risk losing their coverage because of an extreme change between what was projected in their illustration and what actually occurred.
A $12.00 check
From there, I went to work on a project where I helped to explain to life insurance purchasers why they received unsolicited checks in the mail (averaging $12.00 ‑ yes, I did get the decimals right on that one), as payment for a class action lawsuit settlement. Not surprisingly, the lawsuit was based on the premise that the projections of policy values on Whole Life insurance illustrations never came to fruition.
Later I became the illustration software developer for the home office I was employed by. I actually programmed life insurance products into the illustration software that insurance agents still use today. Since then, I’ve spent years working with compliance departments, attorneys, regulators and legislators. Although just a small segment of the areas that I work with in this industry, the segment is large enough for a profound realization on the concept of illustrations.
A chasm
Class action lawsuits based on the chasm between actual and projected on those insurance illustrations have become nothing more than a “cost of doing business” in the life insurance industry. Every company selling cash value life insurance has been a victim with nary an exception. In fact, when performing an Internet search on “cash value life insurance illustration” for a definition for this article, the first hit is for a website that helps to prosecute companies for “unreasonable” illustrations.
While illustrations can be a helpful tool, I feel that they are more of a liability than an aide. And when you consider that historically annuity illustrations have been provided by third-party vendors like me (but without my background, experience and credentials), it all combines into a recipe for disaster. Should someone without a degree be calculating projected values on these contracts? How safe do you think you are if your projections don’t have disclosures about the market’s performance not being an indicator of future policy results, etc.?
Ultimately, the insurance company must have control over the illustrated values on insurance contracts; accuracy, proficiency and compliance must be safeguarded. And when these illustrations become available, they must be used with care. While life insurance could spare some reputation in the ‘90s, the annuity industry has had to fight for what very little we have to offer today.
