On June 4, after long deliberation and extensive consultation with issuers of indexed universal life (IUL) insurance policies and other interested parties by the Life Actuarial (A) Task Force (LATF), the NAIC’s Life Insurance and Annuities (A) Committee adopted new Actuarial Guideline 49 governing IUL illustrations.
The new Actuarial Guideline establishes a uniform methodology that must be followed in determining the maximum annual rate of index-based interest that can be used to calculate policy values in IUL illustrations (the draft Guideline). That methodology includes a maximum interest crediting rate, based on the historical performance of the S&P 500 Index, that may be used in IUL illustrations under the illustrated scale. In addition, for policy loans the Actuarial Guideline limits the maximum spread between the rates of interest that may be credited and charged, to ensure that illustrations do not overstate the effect of any interest rate arbitrage that may be achieved through policy loans. The Guideline also requires disclosure of additional information intended to make consumers more aware of the potential variability of interest rates that may be credited under IUL policies.
Actuarial Guideline 49 is the result of a compromise among industry participants with different views on the maximum interest rate that should be allowed in IUL illustrations. It ultimately received wide support among industry participants because, for the first time, it requires the use of a prescribed methodology, based on the historical performance of a benchmark index (the S&P 500 Index) to limit the maximum annual rate of index-based interest that may be used to calculate policy values in IUL illustrations. Industry participants have projected, based on that historical performance, that the Guideline currently is expected to keep maximum illustrated interest rates below an annual rate of 7%. The use of the S&P 500 Index to determine the maximum annual rate of index-based interest that may be used to calculate illustrated values is intended to prevent the selection of a reference index (or a combination of reference indices) for the purpose of maximizing the index-based rate of interest that would be used to calculate illustrated values. In addition, the Actuarial Guideline establishes separate parameters that limit the assumed earned interest rate that may be used under the disciplined current scale based on the company’s annual net investment earnings rate.
Sales of IUL policies rely heavily on illustrations to explain the potential growth in IUL policy values that may be achieved through the crediting of indexed-based interest. Key supporters of the new Guideline believe that it should help address concerns that some illustrations used to sell IUL policies could be viewed as misleading because of the use of high index-based interest rates to calculate policy values. The new Guideline is also expected to provide greater consistency among illustrations used to sell IUL policies, which should enable consumers who purchase the policies to more easily compare products available on the market.
The provisions in the new Actuarial Guideline establishing the methodology for calculating the maximum annual rate of index-based interest, and limiting the assumed earned interest rate, are scheduled to become effective for all IUL policies sold on or after September 1, 2015 (despite requests for a later effective date). The provisions limiting the maximum assumed interest rate spread for policy loans, and requiring additional disclosure regarding potential interest rate variability, are scheduled to become effective for all IUL policies sold on or after March 1, 2016. The NAIC is expected to vote on the new Actuarial Guideline at its plenary session currently scheduled for June 18, 2015.
More regulatory developments are expected in this area. The LATF has established a new subgroup that will consider several technical improvements to the new Actuarial Guideline that have been suggested by some industry participants. Separately, the Life and Annuities (A) Committee plans to form a new working group that will consider revisions to Model Regulation 582, which governs life insurance illustrations. In addition, the New York Department of Financial Services has announced that it is working on its own standards governing IUL illustrations.