The life insurance industry is split over the accuracy of claims about the value of indexed universal life insurance (IUL) and whether the illustrations used to market such products provide adequate data as to the potential risk of the product meeting the expectations of those buying these instruments.
The issue came to light in an article in the Wall Street Journal Monday which said that New York state’s financial watchdog has launched a probe into the promotion of IUL insurance and is seeking data on the number of carriers doing business in New York and the illustrations used to market such products. The data is due Oct. 1. IUL sales have recently soared, and represented 17 percent of individual life premiums in the second quarter, according to LIMRA.
The New York Department of Financial Services (NYDFS) effort appears to be an attempt to ensure the industry does not suffer the aftermath of the “vanishing premium” issue, which shook the industry in the 1990s, and dealt with use of illustrations indicating that dividends would ultimately cover the total cost of insurance policies sold during the period. These products were sold in the early 1980s, when the Federal Reserve Board choked off the money supply in order to bring inflation, then in the double-digits, under control because it threatened the world economy.
When interest rates declined to normal levels, many people were unable to pay the premiums, losing their investment. The debacle prompted a slew of class-action lawsuits against a number of major carriers, and the failure of some carriers, especially Baldwin United. The issue hung over the industry for the greater part of the 1990s.
NYDFS sought the data because of a combination of factors, a spokesman said, specifically, “rising demand for the product and concerns about overly rosy projections presented to consumers about returns.”
The letter seeking the information was written Sept. 10, in advance of a Sept. 18 conference call of the NAIC Life Actuarial (A) Task Force (LATF). At the meeting, a split apparently surfaced regarding the adequacy of the illustrations being used to promote sale of the products.
The discussion on the call surrounded two separate proposals for an actuarial guideline for IUL illustrations, a proposal put forth by the American Council of Life Insurers (ACLI) and a proposal put forth by four member companies of the ACLI: MetLife, New York Life, Northwestern Mutual and OneAmerica.
The ACLI proposal uses a 25-year look-back period and utilizes an illustrated crediting rate of no greater than 10 percent annually. The ACLI proposal requires a table showing 20 years of market performance, and a table showing average actual index performance in conjunction with index crediting parameters determined using the methodology applicable to the maximum illustrated rate.
The alternative proposal allows for the calculation of investment return by weighing (a) the return on general account assets excluding any derivatives that support the crediting rate and (b) the return on derivatives that support the indexed crediting rate. The alternative requires disclosure of assumptions and justification of indexed derivative return.
ACLI’s proposal for IUL illustrations, which has been adopted as ACLI Board policy, was developed over the past three years, according to John Bruins, an ACLI vice president.
“We believe it provides for uniform guidelines for illustrations that will benefit consumers,” Bruins said, noting that, “While there is some disagreement over the methodology used to set the maximum interest rate to use in the illustration, the overall goal is the same: An IUL illustration that educates consumers so they can make an informed decision about the product they want to buy.”
Officials at Accordia Life, the former Aviva USA life insurance subsidiary and an underwriter of IUL products, said that, “The ACLI continues to provide industry guidance and leadership as it works with regulators on this actuarial issue. Accordia Life is supportive of the ACLI’s approach.” Accordia is a subsidiary of Global Atlantic Financial Group Ltd., based in Bermuda, which acquired Aviva USA’s life division in 2013 and renamed it Accordia Life.
In a letter sent to the task force in August, and in comments during the conference call, MetLife, New York Life and Northwestern Mutual voiced concerns. The letter was signed by three senior vice presidents of the companies, and Robert Samuelson of MetLife summarized concerns surrounding IUL products and illustrations. He acknowledged that the four companies putting forth the Alternative Proposal do not offer IUL products, but said that this does not mean they do not understand them.
Samuelson said IUL products are not equity products, but that the current marketing practices surrounding them and the ACLI proposal “give consumers the impression that they are.” Samuelson argued that “consumers have the impression that these products will earn high rates of return with no downside,” and that the ACLI proposal is “misleading” because it allows for rates that are too high and gives the impression that the 25-year look-back is based on historical returns “even though the look-back is hypothetical.”
The accompanying letter by the three actuaries said that IUL is similar to universal life and that its rising sales “have been propelled by a compelling marketing message: equity market upside with downside protection.”
The product is similar to universal life, the letter said, except that interest is credited based on the performance of an underlying index subject to a cap, floor and participation rate. “The cap and/or participating rate typically are non-guaranteed elements,” the letter said.
Further, the letter argues, “IUL shares little in common” with variable universal life insurance, noting that IUL is not an SEC-registered product and is not required to be sold by registered representatives.
“Similarly, IUL sales practices are neither regulated nor monitored by FINRA,” the letter noted.