Life Insurance Industry Offers Competing Plans for Future IUL Illustration to NAIC Panel
September 23, 2014 by Thomas Harman
WASHINGTON – The American Council of Life Insurers and a partnership of four major life insurers have offered a National Association of Insurance Commissioners’ panel competing plans on how companies should market indexed universal life insurance products to consumers. The insurers are MetLife, New York Life, Northwestern Mutual and OneAmerica.
While the model regulation provides guidance to actuaries on how general account life insurance products should be illustrated, the use of an non-guaranteed index with IUL means actuaries currently have no clear instructions in how to evaluate IUL product illustration.
Task force chair Mike Boerner told Best’s News Service no approval target date is set, but the task force wants to address the matter as soon as possible. However, he said that if and when new guidelines are adopted, affected life insurers would likely need some lead time to comply.
The ACLI’s proposal described IUL as a universal life insurance product that makes all or part of benefits payable to the performance of a benchmark index, something that sets it apart from traditional products.
The NAIC debate is focused on how companies market and illustrate the benefits of IULs, with the interest rate displayed as part of the illustrations being among the most sensitive points. Concerns about the interest rates are part of a new probe by New York Department of Financial Services, which is seeking IUL illustration information from companies.
The ACLI offered a plan for standard-setting earlier this summer that gained the support of several industry groups, according to comments sent to the task force. But Paul Graham, ACLI senior vice president, insurance regulation, said during the conference call a difference of opinion among member companies had occurred over how to illustrate the IUL policies and discussions had failed to reach a compromise. Resistance from the companies is coming from members that do not offer IUL policies, according to a letter to the task force from John Bruins, ACLI vice president and senior actuary.
The ACLI seeks to illustrate policy values at two different interest rates — a user-selected illustration interest rate and a second rate that displays the guaranteed rate but also provides the illustrated rate and the guaranteed minimum. Illustration interest rates would be capped at either a 25-year average look-back rate under current index parameters, a 10% annual rate, or whatever is actuarially justifiable, whichever is lower. The plan also seeks to offer a table displaying annual variability in credited interest rates based on past experience and a table showing a range of look-back interest rates with less favorable index parameters that companies might set.
The alternative plan presented by the four insurance companies is modeled on investing all general account assets and using the profit to buy hedges, instead of passing general account earnings to policyholders.
The companies offering the alternative plan said in a letter to the task force that carriers can use different approaches to manage the IUL risk. Assets backing the IUL products can be divided into the guaranteed minimum rate – usually 0% — and a small part to supply indexed credits that are typically used to purchase hedges that transfer the indexed credit risk to a third party. Carriers can also invest the full general account assets and use the profits to provide indexed credits, another departure from traditional universal life policies that pass the earnings to policyholders using a crediting rate.
The companies criticized the ACLI proposal. Their joint comment letter indicates that ACLI’s approach is based on assumptions that an index’s past performance will repeat and that the price of options purchased to capture index return upside would remain unchanged. “Because these assumptions are not grounded in market theory, they paint an overly optimistic picture that is not sustainable and is likely to lead to widespread consumer confusion and disappointment with IUL illustrations as the economic environment changes,” their comments state.
The companies believe the ACLI’s plan would allow most IUL products to show maximum rates of between 7%-10%. To illustrate a 7.5% return, the companies said in written comments, options would be required to assume 50% annual returns every year. “Such exorbitant returns on options are an unreasonable long-term assumption, which creates unrealistic consumer expectations,” their comment letter said.
The overall goal of the NAIC’s efforts in this area is to provide consumers with an IUL illustration that educates consumers in such a way that they can make an informed decision about the product they want to buy, said ACLI spokesman Whit Cornman.
The Pacific Life Insurance Co., a major seller of IUL policies for the past decade, supported the ACLI’s proposal. Gary Falde, vice president and actuary at Pacific Life, wrote in a letter that the 25-year look back will provide some constancy in determining illustrated rates and is consistent with approaches for other indexed products.
