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NAIC Proposes Rules to Put Restraints on IUL Illustrations

A truce could come to the battle described in this month’s article “How to Compete and Win the Illustration War”.

The National Association of Insurance Commissioners (NAIC) is expected to adopt new rules governing the illustrations to be used in selling index universal life (IUL) products. These rules are expected to be phased in beginning Sept. 1. One area that would be affected is the so-called “guardrail” that limits the expected yield that can be illustrated when selling IUL to prospects.
The NAIC Life Insurance (A) Committee is expected to vote on passing the rules by early summer.  

After the Sept. 1 phase-in, it is likely that implementation of the new rules will be completed March 1, 2016.

As Washington Bureau Chief Arthur D. Postal reported on previously, the proposed rules would allow agents to show prospects a document that supported crediting rates in the 6-to-7-percent range, although so-called “guardrails” mandated by the proposal could limit actual likely yields to as low as 4.5 percent. The proposal also puts limits on loan leveraging.
Provisions detailing information on policy loans and establishing additional standards would go into effect for all new illustrations on policies sold on or after March 1, 2016.

The IUL illustration changes are the result of several months of debate and compromise among the NAIC, several state insurance departments, the American Council of Life Insurers, and a coalition of life insurance carriers including MetLife, Pacific Life, Allianz and New York Life.

In its proposed guidelines, the NAIC said it sought to address the lack of uniform guidance in illustrating IUL. For example, the NAIC said that two illustrations that use the same index and crediting method often illustrated different credited rates. The lack of uniformity can be confusing to potential buyers and can cause uncertainty among illustration actuaries.

In particular, the NAIC proposal provides guidance in determining the maximum crediting rate for the illustrated scale and the earned interest rate for the disciplined current scale. According to a draft of the proposed rules, limits would be placed on the policy loan leverage shown in an illustration. The rules also would require additional consumer information such as side-by-side illustration and additional disclosures that would help consumers understand the product.

The rule would limit the credited rate for the illustrated scale for each index account, according to the draft guidelines. Under the guidelines, the average annual credited rate for the benchmark index account would be calculated for the 25-year period beginning on Dec. 31 of the calendar year that is 65 years prior to the current year (for example, Dec. 31, 1950, for 2015 illustrations), and for each 25-year period starting on each subsequent trading day afterwards, ending with the 25-year period that ends on Dec. 31 of the prior calendar year.

The proposal also addresses the caps that are shown with the illustrated scale. If the insurer offers a benchmark index account with the illustrated policy, the illustration actuary would use the current annual cap for that benchmark account. If the insurer does not offer a benchmark index account with the illustrated policy, illustration actuaries would use their judgment to determine a hypothetical, supportable current annual cap for a corresponding index account that meets the definition of a benchmark index account and use that cap.

For other index accounts using other equity, bond, or commodity indexes or other crediting methods, illustration actuaries would use their judgment to determine the maximum credited rate for the illustrated scale. The parameters of the scale would be required to have “the appropriate relationship to the expected risk and return” of the benchmark index account.

As for policy loans, the proposed rules state that if the illustration includes a loan, the illustrated rate credited to the loan balance shall not exceed the illustrated loan charge by more than 100 basis points.

The proposed rules state that the basic policy illustration also shall include a ledger using the alternate scale shown along with the illustrated scale. In addition, the basic policy illustration shall include a table showing the minimum and maximum average annual credited rates.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Follow her on Twitter @INNsusan. Contact her at [email protected].

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