NAIC Panel OKs New IUL Illustration Rules

A National Association of Insurance Commissioners’ committee approved new indexed universal life illustration guidelines, which are expected to be approved by the full NAIC in a conference call later this month.

All indications are that the guidelines will go into effect on Sept. 1 now that the NAIC Life Insurance and Annuities (A) Committee passed the rules on Wednesday during a conference call.

The panel action reflected a sense of urgency conveyed by members of the Life and Actuarial Task Force, a group of interested parties that included a coalition of mutual insurance companies as well as the American Council of Life Insurers and the NAIC’s consumer representatives.

A consumer group and actuaries projected that the rates agents and brokers can use for illustrations to potential customers would be capped at less than 7 percent. Industry actuaries consulted by InsuranceNewsNet said that agents and brokers can tell their clients that the proposal provides an algorithm that determines the maximum illustrated credited rate based on (a) the cap that a company offers on its S&P 500 index account option and (b) historical performance of the S&P 500 index.

In today's environment, for a product that offers a 12 percent cap on the S&P 500 index account option, the maximum illustrated credited rate would be in the 6.80-6.85 percent range, the actuaries said.

That is far lower than the maximum rates of as high as 10 percent being used in the marketplace, according to the actuaries and the consumer representatives. The actuaries said agents and brokers should also know that while the maximum rate is critically important issue, the limitation of loan leveraging to 100 basis points is an important consumer protection.

Some companies now are using low loan rates and inflated projected returns in the illustrations so that it appears that the client can get "free" money by borrowing from the policy.

It was this issue that led the consumer representatives to change an earlier position and urge immediate adoption of the proposal, with the proviso that work will continue to update it. In their comments, the consumer representatives said they urged immediate adoption because under current guidelines, “when inflated crediting rates are combined with low loan rates, the illustration can be used to present IUL to the consumer as an arbitrage tool providing free insurance. This must be stopped.”

Industry actuaries said another benefit is the standardization of the use of indices. Companies can “cherry-pick” indices and even combinations of indice that have performed well over a period of time to support high illustrated rates for future product performance, the actuaries said.

Under that proposal, provisions dealing with currently payable scale methodology as well as “guardrails” further limiting the proposal would go into effect Sept. 1.

Provisions detailing information on policy loans and establishing additional standards will go into effect for all new business and in-force life insurance illustrations on policies sold on or after March 1, 2016.

During Thursday’s conference call, the committee rejected calls for delay from Mary Taylor, Ohio insurance commissioner, as well as by insurers that included AXA, Allstate and Nationwide Mutual. They sought a delay in the initial implementation date until Jan. 1, because of the difficulty in changing software and educating agents and brokers about the changes.

But, Nick Gerhart, Iowa commissioner, noted that the NAIC had been working on the issue for awhile, and the LATF had accelerated its work in order to an early effective date.

“We need to get this done as soon as we can,” Gerhart said. “We don’t see the need for minor changes to hold up implementation.”


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