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AG49 Proposed Revisions

Wednesday, December 9, 2015

Rules governing life insurance illustration crediting rates, which are used to calculate premiums and death benefits, have been changed for certain product types. Actuarial Guideline 49 was adopted by the NAIC on June 18, 2015. Phase I (sections 4 & 5) went into effect on September 1, 2015. This is the effort of the National Association of Insurance Commissioners (NAIC) to curb the overly optimistic crediting rates used in index universal life illustrations and provide greater uniformity among illustration use.  

On November 3rd, 2015 the NAIC posted a proposed revision to AG49 for comment through November 30, 2015. The proposed revisions are aimed to address situations where an IUL policy makes available multiple index account options with different account charges. This revision, including an example of an illustrated policy with more than one benchmark index account can be found on the NAIC’s website

One of the comments is from the American Academy of Actuaries  pleading for greater transparency of cost in life illustrations, stating “the guideline should explicitly define account charges, which could include but are not limited to, cost of insurance, percentage of premium, per unit and asset based charges." Without disclosing these costs, this is just another example of why illustrations which are relied upon in discussing life insurance, are considered “misleading”[1], “fundamentally inappropriate”[2], and unreliable[3] by financial, insurance, and banking industry authorities.   These new guidelines are a start but hopefully, the comments solicited will address that more is needed to help illustrations become more compliant with published rules, guidance and regulations.

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[1] FINRA Rule 2210 states “[i]t is inappropriate to compare a … life insurance policy with another product based on hypothetical performance…” because “[a]ny comparison… must disclose all material differences…including investment objectives, costs and expenses, [etc]…[the] omission [of which] … would cause the communications to be misleading” according to IM‑2210‑2(c) and Rule 2210(d) respectively.  The Financial Industry Regulatory Authority (FINRA) is the chief regulatory body of the financial services industry.   

[2] SOA FINAL REPORT OF THE TASK FORCE FOR RESEARCH ON LIFE INSURANCE SALES ILLUSTRATIONS concluded that “Illustrations should not be used for comparative policy performance purposes” because doing so “is fundamentally inappropriate.”  The Society of Actuaries (SOA) is the chief actuarial body of the life insurance industry. 

[3] OCC Handbook for Unique & Hard-to-Value Assets cautions regulators and member banks that “policy illustration[s are] subject to a high degree of fluctuation” and thus unreliable for determining product suitability.  The Office of the Comptroller of the Currency (OCC) is operated by the U.S. Department of the Treasury and considered the chief regulatory body of the banking industry.  

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