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Illustrating A Way Forward

The National Association of Insurance Commissioners is tweaking some illustration rules as part of its mission to protect consumers. So far, that does not include the major overhaul sought in some quarters.

Illustrations are a perpetual source of concern for regulators, who thought they had achieved some stability with Actuarial Guideline 49. Introduced in the summer of 2015, AG 49 was supposed to tamp down overly rosy return illustrations in indexed universal life products.

The main life insurance illustration rule took several years of work before it was adopted in 1995.

But some in the industry say it did not take long for a new wave of IUL products to emerge to take advantage of weaknesses in the regulation.

It might be time to put everything on the table when it comes to life insurance illustrations, said Richard M. Weber, a former life insurance agent and executive and now a fee-only advisor.

“When illustrations get too difficult, with too much math, consumers are more likely to default to the conclusion and just accept it.”
- Mike Yanacheak, Annuity Disclosure Working Group Chairman

“Regulators need to reopen the whole issue of policy illustrations and apparently they don’t want to,” said Weber, noting the “long battle” that went into the 1995 illustration regulation.

“A lot of energy and resources went into the creation of the illustration regulation,” he said. “That was 23 years ago and since then, there are products that weren’t even contemplated, specifically no-lapse guarantees and indexed contracts.”

NAIC President Julie Dix-McPeak did not return a call seeking comment.

A Tweak Here, A Tweak There…

Meanwhile, two working groups are debating a pair of relatively minor changes related to illustrations. Both groups ran into difficulties that required further guidance at the fall meeting (which took place after press deadline).

The two models are:

Life Insurance Disclosure Model Regulation (Model Law 580)

This group is debating a short policy overview summary to accompany life insurance sales.

Designed to enhance consumer understanding, the summary proposal has been in the works for nearly three years.

Commissioners are bogged down on two issues, the first being how detailed the policy overview might become if some products offer multiple index options.

Secondly, the group’s charge calls for dual policy summary reviews for model laws 580 and 582 — the Life Insurance Illustrations Model Regulation.

But the group reached general agreement that the overview, while related to illustrations in concept, should be limited to Model 580. On its last call, the group put out a new policy overview with some revisions that would be required in tandem with the buyer’s guide on all life policies.

The group enters December accepting public comment on the revisions. Changes would come in 2019.

Annuity Disclosure Model (245)

The annuity model is drawing more attention as commissioners were unable to reach any consensus before the NAIC Fall Meeting Nov. 15-18 in San Francisco.

The working group is considering tweaking a rule allowing insurers to illustrate indexed annuities using indices that have been around less than 10 years. In these instances, insurers use index components to create a hypothetical “history.”

However, the Annuity Disclosure Working Group wants to double the 10-year limitation to 20 years.

“As long as a unique history can be established going back 20 years, then I think we are in good shape,” said John Robinson of Minnesota during the group’s early November call.

The change is one advocated by Birny Birnbaum, executive director of the Center for Economic Justice.

“The purpose of the 10-year limitation in the model is to prevent the use of illustrations based upon a short time frame that misrepresents the likely longer-term risk-return of the product,” he wrote in an October comment letter. “But it is now clear that 10 years is too short a period of time to capture an economic cycle.”

When illustrations get too difficult, with too much math, consumers are more likely to default to the conclusion and just accept it, Chairman Mike Yanacheak said in agreeing with Birnbaum.

The working group is hoping for approval from its parent committee to continue working on the model.

When illustrations get too difficult, with too much math, consumers are more likely to default to the conclusion and just accept it, Yanacheak added.

UL Problems Persist

Part of the reason illustrations are back in the spotlight can be traced to issues with universal life policies sold in the 1970s and 1980s. A September story by The Wall Street Journal highlighted the plight of seniors across the country who are stuck with failing UL policies.

Some say that rosy illustrations from that time period are to blame.

“Policies are either lapsing, or they are reaching maturity with far less value than anticipated,” Weber said.

UL was a very popular product in the 1980s, when interest rates routinely hit double digits. The policies offer a savings account in addition to the life insurance components. Money deposited into the savings portion earned interest to help pay future costs while keeping premiums down.

And everything was all good until interest rates plummeted below 4 percent following the 2008 financial crisis. Furthermore, many UL policies permitted customers to pay lower payments, or skip a payment altogether, and borrow against the savings account.

“A lot of energy and resources went into the creation of the illustration regulation. That was 23 years ago and since then, there are products that weren’t even contemplated, specifically no-lapse guarantees and indexed contracts.”
- Richard M. Weber, Fee-Only Advisor

Now some policyholders in their 80s and 90s are facing steep premium bills. Their only alternative is to surrender a prime retirement plan asset and be left with nothing to show for years of paying premiums.

“It’s a significant problem for seniors,” Weber said. “These policies are weaker and they have less cash value because they’ve been drained of cash value to pay for higher expenses, which is a self-fulfilling negative spiral. There are a lot of issues and I would say the industry has not responded in a responsible way.”

From the insurer standpoint, everything was done by the book. Illustrations routinely showed customers fat returns of 11-12 percent, but interest rates matched those numbers during the 1980s.

While companies also showed and disclosed worst-case scenarios, customers either didn’t pay attention or didn’t understand.

Industry veteran Kim O’Brien asked the NAIC to intervene during a recent conference call. Iowa Insurance Commissioner Doug Ommen, who was chairing the Life and Annuities Committee call, agreed to meet with O’Brien to discuss the issues.

LIMRA estimates that carriers sold between 2 million and 3 million UL policies during the 1980s and 1990s.

“My focus really is on credibility of an industry that always implicitly had the trust of its customer base,” Weber said. “The credibility of a life insurance company is really, really important.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].


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