Regulators Take One Step Forward, Two Steps Back on LUI Illustrations | Carlton Fields

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On February 24, 2022, the NAIC Life Actuarial Task Force (A) discussed comments from its December 9, 2021 exposure draft on whether to address indexed universal life (IUL) illustrations of index volatility accounts controlled and guaranteed fixed premiums, and if so, how?

The discussion included comments on the 11 comment letters from various stakeholders, including members of the working group and consumer representative Birny Birnbaum.

Comment letters and regulators had the following views:

  • Many have criticized controlled volatility or proprietary indices. They claimed that these indices were designed based on historical data and are difficult to explain to consumers. Birnbaum also argued that these indices often involve a conflict of interest because the sponsors of the index are also counterparties to insurers’ hedging transactions.
  • Several criticized the use of backcasting to determine the credit rate used in artwork, and some believed that some of the perceived problems with IUL artwork would be solved by skipping backcasting altogether.
  • Several claimed that IUL illustrations of controlled volatility index accounts with fixed premiums illustrated rates inconsistent with the intent of AG 49-A. At least one claimed that the rates illustrated were as high as the rates illustrated for multiplier products prior to the adoption of GA 49-A.
  • Several noted that the purpose of an illustration is to educate consumers about the characteristics of the LUI. With this goal in mind, some of these commentators have noted that forcing products with different features to illustrate the same would confuse consumers as to how different products could have the same resultant values. However, opinions varied on how this goal would be achieved – could it be achieved by showing different one-year scenarios to show how index credit features would apply to different scenarios, as suggested by Bill Carmello, per compared to a full review of illustrations and disclosures, as suggested by Birnbaum.
  • Some offered options to address the example of controlled volatility index accounts with fixed premiums. These included applying the 145% net earned investment rate limit to these new index accounts, aligning the credited rate with option spend, and additional disclosures.

Fred Anderson discussed possible next steps, as follows:

  • Make minor changes to AG 49-A, which would place governors on the rate that could be illustrated for controlled volatility index accounts with fixed bonuses.
  • Make slight changes to AG 49-A, which would cause IULs to be illustrated the same as ULs.
  • Make substantial revisions to life illustration requirements, which would require coordination with the Life Insurance and Annuities Committee (A).

Anderson acknowledged that another option could be to implement a short-term solution and then jump with both feet on a longer-term solution with Committee (A). After a brief discussion, the LATF decided to give the Index Universal Life (IUL) Illustration (A) subgroup a turn and passed it the marker to review the options and make a recommendation to the LATF as to which option to continue.

We will continue to watch the IUL hopscotch game and report on the progress of the LATF and the IUL illustration subgroup.

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