State insurance regulators are taking another look at controversial indexed universal life illustrations — albeit with some trepidation.
After all, it has only been a shade over three years since a National Association of Insurance Commissioners’ working group produced Actuarial Guideline 49, which was supposed to rein in illustrations.
A new working group quietly began looking at IUL illustrations this winter. The group has a 2019 charge to “provide recommendations for modifications to AG 49 to the Life Actuarial (A) Task Force.”
Fred Anderson, acting deputy commissioner of insurance for Minnesota, issued eight questions for the group to consider over many months of conference calls.
“My high-level study has shown that IUL products are different now than they were in 2015,” Anderson said during a February call. “There’s additional probability for upside, but higher probability for downside.”
Meanwhile, insurers continue to push the boundaries on IUL, analysts say, with new products illustrating higher and higher returns.
“Indexed UL is an illustration war,” Bobby Samuelson, former senior vice president of product development for Brighthouse Financial, called it.
In particular, new IUL products by Lincoln Financial and Pacific Life are illustrating high rates, he added. Samuelson does product reviews for subscribers and recently studied both the WealthAccumulate IUL 2019 by Lincoln and the PacLife PDX IUL 2.
Both use creative crediting strategies and options, which the insurers tout as offering flexibility and control, but critics say they contribute to inflated and unrealistic illustrations. A Pacific Life spokesperson declined comment; Lincoln did not respond to requests for comment.
“The IUL space is not like the rest of the industry in that the heavyweights in IUL have not traditionally been the heavyweights in the other product categories,” Samuelson explained. “I think they’ll sell a lot more than they have in the past and it’s going to spur other companies who feel increasingly desperate about their own sales to do similar things.”
The issue involves IUL multipliers, which will take whatever index credit is paid for a year and multiply it by one plus the Percentage Multiplier Bonus Rate.
For example, one carrier pays an additional 15 percent on top of the rate returned by the index strategy in effect that year — that’s 1.2 percentage points if the index returns 8 percent, making the total return 9.2 percent in this instance.
AG 49 was developed to provide insurance carriers a more uniform method for calculating maximum illustrated rates on IUL products and to help consumers better understand index life insurance product illustrations.
AG 49 states that: “If an insurer engages in a hedging program for index-based interest, the assumed earned interest rate underlying the disciplined current scale shall not exceed 145 percent of the annual net investment earnings rate.”
Companies are using index performance multipliers on IUL products in order to skirt this requirement, said James Regalbuto, deputy superintendent for life insurance at the New York Department of Financial Services, during a call.
“If you’re creating a product with these multipliers, or these bonuses, you’re not constrained by that 145 percent limitation on the options budget,” he said.
Regalbuto urged the group to “look at whether these types of returns are even supportable based on the underlying economic theory of buying up, or charging the consumer more to buy a larger options budget, and then assuming long-term that you’re going to make all this money on these options relative to a fixed product that’s effectively got the same cost structure.”
‘Very, Very Difficult’
Some of the new IUL product designs are so complicated, some industry analysts say it is hard for agents, let alone clients, to understand how they work.
The Lincoln WealthAccumulate 2019 includes a “Positive Performance Credit” beginning in year two. The PPC is a non-guaranteed multiplier that boosts returns if the market performs well. It is a confusing concept at best, Samuelson said.
“It will be very, very difficult for a client to look at an illustration and say ‘I understand how that multiplier works’ because illustrations use a constant rate and the PPC depends on the specific sequence of returns,” he explained. “There’s a fundamental mismatch between how the PPC works and how illustrations work, but there are significant illustrated benefits for using the PPC.”
Not all insurance commissioners oppose the multipliers. Rhonda Ehrens, chief actuary at the Nebraska Department of Insurance, questioned whether the multipliers are “like a bonus” that just needs to be better explained to consumers.
During a group call, she debated Regalbuto over whether a typical IUL policy with a couple years of zero returns will quickly lapse.
“What I think is even more nefarious here is when we over-illustrate the product ... through multipliers, the planned premium that consumers are making is going to be less than if they received a truer expectation of what the likely return of the policy is going to be,” Regalbuto said. “We can all kind of recognize that products being sold today are being underfunded and I think there’s a real urgency to do something about that problem.”
Ehrens disputed the notion that IUL policies are habitually lapsing after just a couple years of zero returns. If so, they were not sold correctly, or not understood correctly by the consumer, she said.
“Maybe we need to address some disclosures and things like that a little bit more than just the calculations,” she said. “And be sure that consumers understand that you don’t get the high end without the risk of the low end. The companies that I’ve talked to do not intend to have people lapse after two bad years of bad returns. They intend for people to wait it out.”
Customers understand the extremes, Regalbuto countered, and that an index-linked policy can offer incredible highs, or depressing lows. The suppression of premium caused by the promise promoted by multipliers is a real problem, he reiterated.
“I agree that no company wants the product to lapse after a couple years, but there are a lot of companies that would make a lot of money if the products lapsed a couple years before life expectancy,” Regalbuto said.
Other members put some of the onus on consumers. Vincent Tsang, actuary for the Illinois Department of Insurance, suggested requiring one “optimistic” illustration, accompanied by a “pessimistic” one.
“At the end of the day,” he added, “I think the policyholder should take some responsibility in what they are buying.”