A state insurance regulator subgroup on Wednesday offered a “quick fix” to address flawed illustration issues in Actuarial Directive 49-A.
Kind of.
Members of the Indexed Universal Life Illustration subgroup ended a conference call with a nonbinding “straw poll” vote that favored a solution proposed by Securian Financial and Penn Mutual Life Insurance Co. That was enough for the chairman of the Fred Anderson Subgroup of the Minnesota Department of Commerce. , who agreed to send the survey preference to the Life Actuarial Task Force.
But the question seems far from settled. The Securian solution achieves the subgroup’s goal of having non-benchmark accounts illustrating no better than the benchmark S&P 500 index account, said Brian Rock, actuary for Securian’s Individual Life and Annuities Division.
“We’re really puzzled as to why you’d even consider a proposal to fix this from the companies causing the problem…it’s like asking a bank robber to design a system to fix it. ‘stop robbing the bank again.’Birny Birnbaum, Executive Director of the Center for Economic Justice
“The proposal accomplishes this task by linking the options leverage present in the S&P 500 benchmark account with all other indexed accounts as an additional limit,” he said. “Under Securian’s proposal, any account with the same option budget will have the same option leverage limit.”
“I could see it dragging on”
While six of the ten subgroup members voted for the Securian fix, there remains support for a more “conservative” option, Anderson acknowledged. This option is represented in a letter from the Coalition of Concerned Insurance Professionals.
The coalition proposal grew out of comment letters written by Sheryl Moore of Moore Market Intelligence and Bobby Samuelson of The Life Product Review. It now includes 12 “independent insurance professionals,” Samuelson told the subgroup.
He reminded regulators that the purpose of the original AG 49 was to “standardize the retrospective methodology” used in the many proprietary indices that insurers use. Many of these indexes include components that do not have sufficient performance history. As a result, efforts to create a story lead to flawed artwork, critics claim.
“Any time we’ve been there to regulate this, the problem has always been looking back,” Samuelson said. “That’s part of the reason why the coalition’s proposal recognizes that rollback is imperfect, and we should take a hedge budget-based approach. Other groups are taking a similar perspective using the coverage budget as the basis for the illustrated rate.”
Samuelson sought to clarify perceptions that the coalition opposes rollback. That’s not true, he says, but it should be part of an illustration that seeks to properly inform the consumer of risk and reward.
“The difference is that the industry wants to show risk and reward using a flat rate on the illustration,” Samuelson explained. “In other words, they want to show the reward, not the risk. That’s the problem with using a lookback, which is inevitably variable. Showing a level illustrated rate forever creates the concepts in the customer’s mind of a risk-free perpetual reward.
“It can also be leveraged in all sorts of product strategies that can be played to maximize illustrative performance, which is exactly why we went through three rounds of these regulations.”
The NAIC adopted AG 49 in 2015, but insurers quickly circumvented it by offering IUL products with multipliers and bonuses. This led to AG 49-A, adopted at the end of 2020 after this LATF directive: “designs with multipliers or other improvements shall not illustrate better than designs without a multiplier”.
Time issues
Anderson expressed concern that advancing the coalition proposal would not be a “quick fix” desired by the subgroup.
“The coalition proposal is definitely on the table,” he said. “I understand that there may not be many words [changes]but there’s going to be a ton of comments and a ton of issues to come and I could just see that it drags on and we’ll never address the main issue.”
In addition to the “quick fix” at AG 49-A, the members of the subgroup also play with the reopening of the entire Life Insurance Illustration Model Settlement (#582). The creation of Bylaw No. 582 was an acrimonious process that took years before the National Association of Insurance Commissioners adopted it in 1995.
The subgroup is accepting comments until November 22 on subsections of #582 to consider opening and concepts for draft revisions.
Samuelson and other supporters have dismissed the idea that the coalition fix can’t be done quickly.
“The coalition’s proposal poses no threat to indexed UL sales and will serve to better understand consumers,” said Birny Birnbaum, executive director of the Center for Economic Justice. “We’re really puzzled as to why you would even consider a proposal to fix this from the companies causing the problem. I mean, it’s like asking a bank robber to design a system to stop him from robbing the bank again.”
Editor-in-chief of InsuranceNewsNet, John Hilton has covered business and other beats in more than 20 years of daily journalism. John can be reached at [email protected]. Follow him on Twitter @INNJohnH.
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