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.