Many of you are likely aware of recent regulations developed by the National Association of In-surance Commissioners (NAIC), in concert with insurance companies and consumer groups, which provide for more uniform and reasonable methods for calculating maximum illustrated rates on Indexed Universal Life (IUL) policies.
The new maximum rates apply to illustrations produced on or after September 1, 2015 and additional regulations concerning policy loans and new disclosures take effect March 1, 2016. This is not unlike the 12% maximum rates for projections purposes on variable life policies.
A major point of the new rules is to require the use of a uniform methodology based on the historical performance of a benchmark index (the S&P 500) to limit the annual rate of index-based interest that may be used to calculate projected policy values. The fundamental rules are based on a one year point to point calculation using the S&P 500 Index assuming a 100% participation rate and a 0% floor. The look back averages the annualized rates from all of the 25 year rolling periods for the past 65 years of the S&P 500 index returns. This will affect many carriers’ illustrations as few have gone back for as many years. Ultimately, the actual max rates will be based on caps, floors and participation rates of individual products.
Based on what I see, looking at multiple carriers, most caps are in the sixes with a couple in the fives and some in the sevens. This is opposed to some products and carriers which offered maximums of 9 or 10%. The above parameters currently result in a Benchmark Index Account, assuming a 12% cap, of 6.86% which is why that number pops up as the max for many products.
The new rules do not impact the participation rates or the crediting caps nor will it impact the actual performance of any products. It is interesting to see a number of carriers’ Q&A materials include a reassuring statement that the changes will not affect the competitiveness of products. I suppose I shouldn’t be startled that this needs to be related. The fact that there may not be a differentiation in the minds of some regarding how a product is illustrated relative to how it actually performs is disappointing but not unexpected. It should be no surprise to anyone that a change in illustration parameters will not result in a change in performance, however, I am afraid that many will fear a drop in sales due to the inability to illustrate unrealistic ongoing crediting rates (thus the rationale for the regulations in the first place).
Furthermore, carriers must attest, actuarially, that policy benefits of a product are supportable given the maximum illustration rate determined. This is accomplished by preventing the assumed earned interest rate from exceeding the general account portfolio rate by 145%.
In March of 2016 AG 49 will limit the spread between the crediting rate illustrated and the policy loan rate for participating loans. The illustrated index crediting rate cannot exceed the illustrated loan rate by more than 100 basis points on the loan balance. Also, additional consumer disclosures will be included in the ledgers, such as alternative scale rates and a table showing historical index performances over the last 20 years.
I believe these changes are long overdue and I welcome the fact that they are here now. Since I am the guy who is often brought in to offer second opinions and to fix problems, I regularly see proposals which bear no resemblance to realty and disasters which have resulted from ridiculous assumptions and a lack of education. In my experience, one of the most significant abuses is utilizing IUL products in premium financing scenarios. Premium financing can be a fundamentally sound strategy if well understood and judiciously implemented with reasonable assumptions but that is not what I often discover. What I usually see is decades long commitments based on point-in-time economic conditions which will change substantively and wring the arbitrage out of the transaction when no realistic exit strategy has been outlined or accounted for. From my perspective, AG49 doesn’t offer a lot to close down these abuses.
There is an argument that the new regulations will impede the innovation of IUL products as the illustrated crediting rate will be limited based, in part, on general account returns rather than higher index returns. However, the abuses in the market have been so severe in many situations that something had to happen. This may be an example of an imperfect solution being better than none at all. There is a lot riding on this as IUL sales have driven a substantive growth in premium but my perspective is that the growth may be detrimental to the market (provider and consumer alike) if it was driven by inappropriate and/or unrealistic market conduct. Reasonable minds will certainly disagree on this.
The cynical side of me wonders if these new regs will ultimately mitigate the deleterious effects wrought on consumers by some agents hell bent on doing whatever it takes to make a sale. I truly hope they are a good start.