30 ID Trends 2020
Regulatory Trends
IUL Changes : AG 49A
Retroactive application would likely cause confusion and erode consumers ’ confidence .
Gary A . Sanders is Counsel and Vice President , NAIFA Government Relations . Contact him at gsanders @ naifa . org .
Life insurance illustrations are an important part of the disclosures that are made available to insurance consumers . An illustration shows the policyholder how the policy should perform under the specific conditions described in the illustration .
Approximately five years ago , state insurance regulators working through the National Association of Insurance Commissioners ’ Life Actuarial Task Force ( LATF ) attempted to rein in the more overly optimistic illustrations used for indexed universal life ( IUL ) products .
Providing uniformity
These efforts resulted in the development and adoption by the NAIC of Actuarial Guideline XLIX ( AG 49 ), which was designed to provide a degree of uniformity to how policies whose performance are tied to an external index are illustrated by setting a cap on the illustrated credited rate .
AG 49 worked well for several years , until regulators felt insurers had begun to find ways around the AG 49 limitations through the use of IUL bonuses and multipliers . Regulators ’ concerns were amplified by their perception that the AG 49 requirements did not fully reflect the potential financial downside of these bonuses and multipliers .
In response , the NAIC created the IUL Illustration Subgroup to limit the rosier aspects of IUL illustrations by restricting how much of the potential benefit of bonuses and multipliers could be illustrated . The limitations would prevent illustrations of IUL products with bonuses or multipliers from illustrating better than IUL products that do not have these features .
Contentious issue
While a consensus among regulators had developed around this approach , a contentious issue arose over whether this tightening of the AG 49 restrictions should be applied retroactively to in-force policies , as well as to newly issued contracts .
As a general matter , NAIFA opposes the retroactive application of laws and regulations , including NAIC models or guidelines , to existing contracts . Retroactively applying revisions made to NAIC models to in-force business is likely to confuse consumers and adversely impact the consumer / producer relationship .
NAIFA communicated its views to the Subgroup in a November 12 , 2019 comment letter as well as through oral testimony provided during Subgroup meetings .
NAIFA argued that retroactive application would be likely to cause confusion , erode consumers ’ confidence in a producer and could unfairly damage the reputation of producers who used illustrations that were following the rules in place at the time of sale .
Consumer confusion
Furthermore , retroactive application of the proposed AG 49 revisions may lead to the client ’ s perceiving that the policy is not performing as expected or as described in the original illustration , which could lead to inappropriate and costly surrenders and replacements of products . This would impose unnecessary costs on consumers , because they would be replacing a policy based on revised illustration requirements rather than on actual changes to the product itself .
NAIFA ’ s arguments against retroactivity were persuasive — the Subgroup , Task Force and the full NAIC adopted the AG 49 revisions ( now named AG 49A ), but did not make the revisions applicable to in-force policies .