On September 1, 2015, the first phase of Actuarial Guideline XLIX (AG 49) became effective for all Fixed Index Universal Life (FIUL) insurance policy illustrations. Jason Wellmann, senior vice president of life distribution at Allianz Life Insurance Company of North America (Allianz Life), and Todd Petit, assistant vice president actuary and illustration actuary for Allianz Life, offer their perspectives on the new guideline.
Q: What was your initial reaction to the proposed AG 49?
JW: AG 49 was originally proposed by manufacturers of FIUL policies — including Allianz Life — that wanted to develop a consistent methodology for determining maximum illustrated rates. In its initial stages, the proposed methodology was simple and straightforward, and could easily be understood by consumers.
But as certain non-FIUL companies questioned the proposal and proposed alternatives, the conversation became more actuarial in nature. At that point, we relied heavily on our actuaries to demonstrate the strong value that FIUL provides to consumers and help shape a compromise that we could support. At Allianz Life, we wanted a level playing field, and we think that was achieved.
Q: Todd, can you describe your role as the illustration actuary for your company?
TP: The illustration actuary performs a series of tests to ensure that the illustrated scale used in a life insurance policy illustration is compliant with insurance regulations and guidelines. Many financial professionals know that illustrated values cannot exceed the current rates and charges in effect at the time of the illustration (called the “currently payable scale”), but some may not know there is a secondary limit placed on illustrated values (called the “disciplined current scale”).
The purpose of the disciplined current scale is to prevent a company from showing an illustration of a product that they cannot afford. My job as the illustration actuary is to determine the disciplined current scale for each policy we illustrate, and then set the maximum illustrated scale.
Q: What factors do you consider when you determine the disciplined current scale?
TP: In order to demonstrate that a policy can be afforded at a certain scale, a company must be able to show that the accumulated cash flows equal or exceed the policy’s cash value at certain durations.
Accumulated cash flows are a company’s “cash in” minus “cash out,” and reflect premiums paid by the policy owners, investment income earned by the company, expected death benefit claims, living advantages such as withdrawals or loans, management expenses, commissions paid to the agents, and taxes incurred. The illustration actuary must use a number of assumptions for these calculations, including mortality assumptions, policyholder behavior assumptions, and interest rate assumptions.
Q: Prior to the adoption of AG 49, what rules were in place for FIUL insurance illustrations?
TP: Prior to AG 49, illustration actuaries looked to the Life Insurance Model Regulation and ASOP 24 for guidance on FIUL. For traditional UL policies, companies credit a set rate of interest directly to the policy, so the guidance was straightforward: The maximum illustrated rate is the credited rate on the policy, so long as the illustrated scale can be afforded (i.e. it passes disciplined current scale testing).
But for FIUL policies, instead of crediting a set rate of interest directly to a policy, companies typically invest that rate in derivatives and then apply their payoffs to the policy in the form of indexed interest. So two grey areas existed for FIUL:
“What is an appropriate derivative payoff assumption for disciplined current scale testing?” and
“What is an appropriate credited rate for the policyholder illustration?”
Q: How did AG 49 address those questions?
TP: Section 4 of AG 49 addresses the illustrated crediting rate question directly, by prescribing a process to determine the maximum illustrated rate for each policy. There is still some actuarial judgment in the determination of the illustrated rates for each individual index allocation within a policy, so financial professionals may see some differences between companies in their approach. However, the overall maximum illustrated rate in place for each illustration should be fairly consistent between companies assuming they have similar index allocations and caps.
Section 5 of AG 49 limits the investment income earnings assumption used in the disciplined current scale testing. This change impacts the testing process for the illustration actuary, and may indirectly impact the maximum illustrated scale, but shouldn’t be a prominent component for non-actuaries.
JW: As we start to see these new illustrations in early September, there may be some companies with illustrated rates that seem to be outliers for products with features that are similar to other products in the industry. If financial professionals see an illustration that seems out of place, I would encourage them to ask why.
For example, does the illustration credit a large bonus that isn’t guaranteed? Or does the company have a solid history of rate renewals? And don’t be shy about asking the company’s illustration actuary to talk you through their process — a good insurance company should be transparent about its sales practices.
Q: Jason, from your perspective, how do these changes impact the sales process for FIUL?
JW: Most illustrated rates for FIUL illustrations will be lower than before, which opens the door for increased product education. Before AG 49, the industry often focused on the numbers shown in illustrations, but now there will be more focus on product features such as index allocation options and riders. There will also be more emphasis on training and education, both for financial professionals and consumers.
Allianz Life heavily invests in education: Last year we had over 1,000 financial professionals come to our home office for product and hedging training. And I think there will be more focus on the insurance companies themselves, both in terms of company strength and rate setting history.
Allianz Life is focused on the smooth implementation of AG 49 and hopes that the rest of the industry also follows the spirit and intent of the guideline so we can achieve a level playing field. But realistically, we know that when there is room for interpretation; a few companies may push the limits.
We’ve already seen certain companies do this with illustrated bonuses that are not guaranteed, and we’ve also seen some companies change their product floors and account charges to obtain a higher illustrated rate. This is exactly why product education and transparency are important — so financial professionals can compare products holistically by considering all features and benefits, and avoid being misled by isolated benefits.
Q: What additional illustration topics do you expect in the upcoming months?
JW: Phase 2 of AG 49 goes into effect on March 1, 2016, so we’ll be implementing the new alternate scale, historical index performance table, and loan limitations in the upcoming months. Allianz Life has been requiring a version of the alternate scale since 2008 and has offered an optional historical table since 2006, so these are both changes we believe are good for the industry.
The loan leverage limitations are good for tempering expectations but could be difficult to explain, so we’re going to be helping financial professionals with talking points on why the illustrations operate differently than the provisions of the actual policy.
Additionally, regulators are closely watching how companies implement AG 49, including their use of illustrated bonuses, account charges, and floors, and we have people at Allianz Life who are actively a part of those conversations. As FIUL continues to be a popular choice for consumers seeking death benefit protection and the opportunity to build cash value accumulation, we support guidelines that increase education, sustainability, and transparency throughout the industry.
Allianz Life is committed to doing what’s right, and we believe AG 49 goes a long way toward that goal.