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Life Health > Life Insurance

Industry divided over IUL illustrations

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The life insurance industry continues to be deeply divided over the content of illustrations agents use in selling indexed universal life insurance (IUL).

The differences are outlined in comments being submitted to the National Association of Insurance Commissioners (NAIC), which has proposed actuarial guidelines governing the IUL illustrations. The comment period closes Thursday, but two of the comments obtained by National Underwriter Life & Health expose the divide. The issue is also expected to be hotly debated when the NAIC’s Life Insurance and Annuities (A) Committee takes up the issue at the NAIC’s winter meeting in Washington next month.

The exposure draft was developed by the American Council of Life Insurers. 

In comments submitted to the NAIC today, the ACLI argues that its proposal is appropriate. The ACLI said it developed its illustration package after identifying certain goals the illustration should meet, and then developing illustrations that conform to those guidelines. One of the goals, the ACLI said, is to create “consistency in determining illustrated rates for similar IUL products.”

The ACLI proposal meets these goals because policy values are illustrated at two nonguaranteed interest rates in addition to the guaranteed rate in order to highlight the likelihood of variability of returns; a table of historical index rates is provided to highlight year-by-year variability of returns; and because a table of historical averages based on different index parameters is provided to highlight variability of nonguaranteed elements and the impact to credited rates.

Amongst the supporters of the ACLI proposal is Pacific Life, the largest underwriter of IUL products.

In a letter submitted to the NAIC, PacLife officials say they “welcome working with the NAIC to establish uniform IUL illustration standards.” The letter notes that an “important aspect” of the ACLI recommendation is to require that clients see illustrations at multiple rates, consistent with the variable nature of equity returns and consistent with illustration standards for variable universal life products.

Moreover, the PacLife letter said, “The maximum illustrated rate allowed by the ACLI recommendation is less than the returns that our clients have earned over the last 9 year period that we have been offering the IUL product.”

In fact, the PACLife letter said, “we backtested our product for 17 years before we began selling and we saw results that were very similar to the results clients have earned over the last decade.”

Several larger insurers, however, have submitted comment letters voicing “strong concerns” with the ACLI proposal. They have formed a coalition that includes MetLife, New York Life, Northwestern Mutual and One America. The concern of the large insurers  is that they fear they will wind up paying the bill if yields promoted by the proposed ACLI illustrations don’t meet investor expectations.

A comment letter from New York Life Insurance, for example, said its analysis concludes that “the ACLI proposal would produce illustrated values that have a less than 10 percent probability of being achieved over the long term.”

The NY Life comment letter said its analysis was produced by a team of actuaries and investment professionals and has been peer reviewed by actuaries both within New York Life and externally.

“We have not seen any similar analysis that refutes these conclusions, and we believe that very aggressive assumptions would be necessary in order to demonstrate a reasonable probability of achieving the maximum illustrated rates that would be allowed by the ACLI proposal,” the New York Life letter said.

The NY Life comment letter said the illustrations to be used in selling IUL must conform to the NAIC Life Insurance Illustrations Model Regulation.

However, the New York Life letter said, “The ACLI proposal is silent with respect to appropriate assumptions for use in supportability testing,” and not “consistent with other general account product illustrations.”

Further, the NY Life letter, the ACLI-proposed illustrations are potentially “susceptible to ‘gaming’, that is, subject to ‘creative’ interpretation.”

IULs are also coming under scrutiny by New York state regulators. Last month, the New York Department of Financial Services launched a probe into the promotion of IUL insurance and is seeking data on how many carriers doing business in New York and the illustrations used to market such products. The data was due Oct. 1. IUL sales have recently soared, and represented 17 percent of individual life premiums in the second quarter, according to LIMRA. 


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