Regulators and industry representatives who have been grappling with new rules concerning Indexed Universal Life Insurance (IUL) illustrations for the past year came together in person on March 26 at the Life Actuarial Task Force (LATF) as part of the National Association of Insurance Commissioners (NAIC) Spring National Meeting in Phoenix. The illustrations issue has divided the industry. A small group of large companies that do not write IUL led by MetLife, New York Life and Northwestern Mutual (the Non-IUL Group) has leveled pointed criticism at existing IUL illustration practices as well as the efforts of other members of American Council of Life Insurers (ACLI) to propose new IUL illustration guidelines to the state regulators on LATF.
Now LATF, the ACLI and the Non-IUL Group appear to be nearing consensus. On March 18, LATF, led by Minnesota actuary Fred Anderson, exposed a draft guideline, and regulators and interested parties spent more than two hours discussing the draft line-by-line at the March 26 meeting in Phoenix. Almost all interested parties involved in the process seem willing to accept the new guideline. Not surprisingly, regulators in New York have indicated they will head in a different direction.
Universal Life Insurance is a permanent life insurance product that allows the customer to make flexible premium payments into an accumulation account. Every month, cost of insurance (COI) charges and expenses are drawn out of the account and current interest determined by the insurer (with a guaranteed minimum) is credited to the account.
IUL offers customers upside exposure to a stock market index (with a cap) coupled with downside principal protection in the form of a minimum interest rate guarantee. The stock market index (such as the S&P 500) is only used in a formula to calculate how much interest is credited to the policy accumulation account. None of the assets supporting IUL policies, however, are directly invested in the equities markets. Instead, the bulk of the assets are deposited in the insurer's general account and generate traditional general account returns. A small portion of the assets are then employed in hedging strategies to support the index-based crediting rate. Unlike variable policies where premiums are invested in subaccounts similar to mutual funds, IUL policies are not considered securities products. Therefore, any life insurance agent can sell IUL, not just the smaller subset of agents who also have a license to sell securities.
The current debate
The central question is how IUL policies should be illustrated during the sales process. The current NAIC model rule allows companies to use current interest parameters and current charges to illustrate the policies, but it does not address IUL policies or contemplate a credited rate that relies on the performance of an external index. As a result, most companies offering IUL policies use a "look back" at the past performance of the outside index in order to generate the illustrated rate. This approach has led to illustrated rates commonly in the 7-9% range with some companies illustrating at more than 10%—much higher than illustrated rates for traditional whole life or universal life policies.
In an effort to bring consistency to the illustration process, the ACLI set up a task force to craft a new actuarial guideline for IUL policies. On May 14, 2014, ACLI sent the proposed guideline, which included a maximum illustrated rate based on a 25-year look-back period, to LATF.
The Non-IUL Group believes that even this approach does not lead to realistic illustrated rates. In a letter dated August 12, 2014, the Non-IUL Group argued that illustrations should reflect the fact that IUL performance is driven primarily by general account interest returns rather than equity returns. They pointed out that if companies were allowed to use a 25-year look-back for whole life or universal life illustrations, such policies would likely illustrate at 7% or more.
The debate among the ACLI, the Non-IUL Group, other interested parties and LATF continued through the NAIC Fall National Meeting in Washington and culminated in the LATF compromise draft exposed on February 19, 2015 and subsequently revised on March 18 in advance of the NAIC Spring National Meeting. The draft sets a maximum illustrated rate for IUL policies based on average historical index performance going back 65 years. Actuarial observers agree that this methodology will result in maximum illustrated rates for IUL in the 6-7% range, and most everyone seems to be on board, if only reluctantly.
Meanwhile, just as industry and the rest of the regulators appeared to be closing in on a consensus approach, New York has chosen to go its own way. On September 10, 2014, the New York Department of Financial Services (NYDFS) issued a three-page Section 308 letter to all life insurance companies authorized to do business in New York, asking for information about IUL sales in New York and illustration methodology. At the March 26 LATF meeting, NYDFS representative Michael Cebula announced that New York would vote against exposing the new LATF draft and said that New York would be coming up with its own requirements for IUL illustrations as part of a revision of New York Insurance Regulation 74.
LATF and the interested parties involved still have a way to go in ironing out the technical details of the draft guideline, but the broad outlines are now clear. Less clear is what action New York will take and when.
- LATF materials circulated in advance of the March 26 Meeting (IUL Materials begin on p. 65) [NAIC]
- Supplemental LATF materials circulated in advance of March 26 Meeting (IUL materials begin on p. 31) [NAIC]