Consumer Reps Ask States to Change Annuities' Faces
LifeTrends, a life insurance data company, posted a spreadsheet showing that the guidelines decreased maximum illustrated returns for some policies by more than 1 percentage point but led to small increases in illustrated returns for some other policies.
The NAIC Life Insurance Annuities Committee came close to shutting down a panel that was working on IUL illustration rule updates, the Indexed Universal Life Illustration Subgroup, because of concerns about a lack of regulator agreement on how to move forward, but the committee ended up keeping the subgroup in operation.
The new presentation: Birnbaum and Cude’s new presentation relies partly on points about reengineering life and annuity illustrations and other disclosures that Birnbaum made during a talk in November 2020.
They also draw on an article about investment index design by Bobby Samuelson and a paper about the weaknesses of disclosure-based consumer protection efforts that was created by the Australian Securities and Investments Commission and the Dutch Authority for the Financial Markets.
Samuelson suggested that index designers have created indexes that look unusually good in 10- and 20-year historical illustrations but seem unlikely to perform especially well in the future.
The Australian and Dutch team argued, based on research on consumers’ use of many types of advisors and disclosures, including mortgage loan advisors, that disclosure requirements may backfire, by causing high-risk advisors who provide the disclosures to seem more trustworthy.
“Re-engineer illustrations regulations for a consistent approach for indexed annuities and life insurance,” Birnbaum and Cude tell regulators in their new presentation, which is included in a meeting document packet. “Eliminate hypothetical historical results and projections of non-guaranteed outcomes.”
Eliminating both outcomes will improve the illustrations and reduce the odds that insurance agents and brokers will end up acting as financial planners without having the training to do so, the reps say.
Birnbaum and Cude have included what they hope could be a simpler, more complete tool for showing how products will work: A set of two tables that would show how 12 product variables would perform in very bad markets, very good markets and markets where investment indexes changes just a little or stay the same.
Credit: Center for Economic Justice
If an annuity or life insurance policy issuer can change an important performance-related parameter, such as return caps or participation rates — the percentage of index gains that flow into a client’s own product returns — the issuer should also show how how it has handled those types of parameters for all of its products in the past, the reps say.
They note that the product performance tables, which were developed by Birnbaum, have not yet been consumer-tested and would need to be to see if they would work.
The ferment: Larry Rybka, the chairman and CEO of Valmark Financial Group, who has been writing about problems with unrealistic indexed life and annuity product illustrations for years, is getting enthusiastic responses from life and annuity professionals for his LinkedIn posts about the topic.
In October, for example, Rybka argued in a post that the maximum rate included in indexed universal life policy illustrations should be 5%, rather than the 5.5% default illustrated rate included in Actuarial Guideline 49, because alternations of good years, when rates are capped, with down years, when investment-linked additions to the crediting rate are zero, mean that the actual rate will affect actual returns and hold actual returns below the default rate.
Many life and annuity professionals replied with comments about their own concerns about the high rates they see in illustrations.
But other participants in the conversation, including regulators at the NAIC, have questioned whether the critics’ proposals would work better than the rules and disclosures now in use.
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