2019 0312 – IULSG – IUL Illustration Subgroup – (A) – NAIC

2019 0312 - IULSG - IUL Illustration Subgroup - (A) - NAIC

2019 0312 - IULSG - IUL Illustration Subgroup - (A) - NAIC - 2019-1, NAIC Proceedings --- [BonkNote]
- IUL Illustration (A) Subgroup March 12, 2019, Minutes (Attachment Fifty-Seven)(Attachment Fifty-Seven) .......... 6-835
  - Academy Comment Letter (Attachment Fifty-Seven-A) ............ 6-837
  - Sample Illustration (Attachment Fifty-Seven-B) ........ 6-840
  - Comment Letters in Response to Indexed Universal Life (IUL) Questions (Attachment Fifty-Seven-C) ............. 6-844

2019 0312 - IULSG - IUL Illustration Subgroup - (A) - NAIC --- [BonkNote]
- 6-835 - Donna Megregian (American Academy of Actuaries—Academy) discussed the Academy’s comment letter (Attachment FiftySeven-A) and the accompanying sample illustration (Attachment Fifty-Seven-B). She said the sample illustration provides a high-level overview of current illustration requirements.
- 6-835 - Birny Birnbaum (Center for Economic Justice—CEJ) said deluging consumers with tables of numbers does not necessarily foster understanding because of consumer biases and their limited knowledge.
  - He said the current structure of the illustration presents the IUL policy as an investment.
  - He said the CEJ comment letter suggested a way to change the structure.
  - He said illustrations currently show annual gains based on the various rates, but they do not show the volatility of returns.
  - He said consumers must be able to see the volatility of returns on an annual basis to understand the risks.

Academy Comment Letter (Attachment Fifty-Seven-A) ............ 6-837
- 6-838 - 2a. If “yes”, how should the downside of the product be communicated with applicants?
  - The downsides, or risks in the product from product features less favorable than the current scale, of an IUL product are currently required under either Model 582 or AG 49 and illustrated in the following ways relative to the current illustrated scale:
  - ⇒ differences in lapse years shown in guaranteed, midpoint, and alternate scales;
  - differences in policy values shown in guaranteed, midpoint, and alternate scales;

Fred:
- Letter ( ) -
  - Range of Potential Returns that would be illustrated showing gains and losses, NAIC Precedent - NAIC Annuity disclosure
  - Summary Page comparing features... comparisons of Illustrations.
  - Fred: 2 concepts- Illustrate range of returns, is that desirable?
    - Mike (TX) - range of returns does make sense, you don't illustrate one side if you have the potential for that range.
    - Rhonda Arents: I feel that no matter what the product is the ability for the insured to understand what they are purchasing has to show a range of plausible scenarios. Definitely ups and downs are logical to be demonstrated. ....
      - Some of the comments also talked about consistency with some of the Annuity direction which would be to show worst case, but I know that some of us may be against the opposite, which would be showing best case.
      - If we require as worst case, which would be zero return every year then do we also have to show what the cap or if the index max was hit every year. And then how do we fit a lot of different scenarios on any illustration. So, at the risk of simplicity or not bogging the consumer down with too much information, how do we get that range to be sort of perfect.
    - Mike (TX)
    - Pete - mirror reality, move up and down over time, better tool of how they work rather than flat rate used now.
    - Fred - Interested party ... Balance of providing sufficient information without overwhelming...
    - Realbuto (NY) - "I think one of the things that we should think about is what is really the role of the Illustration."
      - "I hear a lot of people talking now about how we are essentially going to treat this like it's an investment product when it's not really an investment product. This is a fixed Product."
      - "It does have additional volatility as a result of the mechanism by which interest is credited."
      - "But I think we need to recognize that this is not a security. We continue to push the discussion as if it is a security and allow the consumers to be pitched on these ideas that rather than a life insurance policy this is just a place to earn excess returns. So, I think rather than having a situation where well, if we are going to show the worst we have to show the best case scenario. I would categorically reject that and say this is a life insurance policy. An Illustration is not designed to show a return expectation. It's designed to show the consumer how the products work and to establish conservatively how much money they would need to put into the product in order to maintain the coverage. Are they taking the discussion in a different discussion like it's a security. Which .....exposes all kinds of regulatory shortcomings, most of which happened at the Federal Level that lead us to this point where these illustrations are out of control."
    - Craig Chupp (VA) - now required to show guaranteed values..... how would worst be different than showing the guarantees? Guaranteed values shows all changes. people might think that may never happen. historical returns.
    - Vincent Tsang (IL) - Illustrations manage expectations. NY comments are valid. life insurance policy not security. agent. rosy picture. should show volatility. Great return vs lousy returns. rosy vs realistic picture.
    - John Robinson (MN): working on naic annuity illusttions
      - "I think that there are 2 wildcards that need to be considered so you look at all angles of this thing."
      - "One is that as much as you put together an illustration and you intend for a particular message to be conveyed, that is not necessarily the message that the prospect is going to get. Nor is it necessarily what the prospect is going to be looking for. And the other Wildcard. [Stop] So, the real question d
      - 2/ - "We're working with the perceptions of someone and what we intend may not be what is exactly going on in their mind."
      - "The other things is what the Person who spoke right now is getting at about the agent. And the value of the Illustration is shaped a lot of times by how it's presented by the Agent. And if you provide an Illustration that doesn't provide what the Agent thinks the prospect is looking for then maybe that Illustration doesn't get put in front of the prospect. I think those are two Big Wild Cards that affect everything we're trying to do here."
    - Dave Hippen (WA) - "I think it's appropriate to consider seriously what New York said. We know that one of the attractions of these products is there is a potential for some improved returns that will increase cash values, but also makes it possible that there won't be as much need for as high of premiums. But I think it's appropriate for us to make sure there is some focus on not just on the downside, but how much may be needed to continue the product and to pay a death benefit and keep it inforce in the future. I have some real sympathy for what was said about the agents being a wildcard. I have experienced agents to the dismay of the insurance department where I was having their licenses pulled because they started comparing these things to CD's and other investments and violated some securities laws. I think we need make sure the illustration doesn't push in that direction and emphasize some caution for consumers that think they are buying an investment and not a life insurance policy.
  - Fred - Birny do you have any comments?
  - Birny - Tables not good. consumer studies. biases, limitations. tables like we looked in the beginning... not helpful.. tables aren't useful re: risk. whether you use a high, low rate...it simply shows constant interest over time. IUL as investment... always as a superior investment. our comments suggest a way to do that. high, low, middle range... isn't useful... static. not going to make much difference... numbers going to change at the end,, but show no risk to the consumer. What's not being shown is .... potential liability of consumer to pay in more. arbitrage.... Illustrations too much information and not the right information.,
  - Fred- seen illustrations, tables required under AG49... Best practices in that area... wide range.... ideas have come up with for consumers to better understand products
  - Birny - are those examples available to review and learn from?
  - Fred -
  - Pacific Life - we can provide one.
  - Fred - Any other comments? especially demonstrating the variability within the illustration
  - 3/ - Donna - Table at the end that shows the rate...Values not shown because values may be more favorably than the DCS. Annuities don't have Illustration Actuary testing, responsibilities
  - Tom Taylor - Donna's example 11.75% would be at risk. money spent options depenent on returns. on 4.32% lowest rate. Do consumers understand that the product is going to cost more if.....
  - Sheryl Moore - Piggyback on Tom Taylor's comments. Non-guaranteed having insurance illustrations to increase. paying for higher returns. compounding the number of factors that can change form original illustration to inforce illustrations. Agrees with Regalbuto - Fixed Life Insurance vs Security. many factors could change the illustration, not just interest rate.
  - Brian Lessing (AXA/Equitable) - re: Volatility. Difficulties with representing that in a new business illustration. Time Period. Hypothetical pattern. Staying within the limits of the Disciplined Current Scale that Donna had mentioned. We are of the opinion that Inforce Illustrations become a critical tool. Not only for IUL, but for all ... in this context they would be very helpful for adjusting premiums if necessary. So, that would be out perspective on that.
  - Fred: have been 2 adoptions of AG49. <More>
  - Regalbuto - I think this question misses the mark as to what is going on. A lot of the comments around risk / return or consumer choice are attempts at misdirection by certain elements of the industry. I think the key issue as to what's going on with these illustrations is that certain elements are captured by the AG49 formula and certain elements are not. For instance if you have a high Cap Rate or a high Participation Rate that gets factored into the formula. If you use a Bonus or a Multiplier it doesn't.
    - So, I think even before we get into this larger question of Risk / Return trade-off and how do you show that. I guess we are going to be in a world where people buying fixed products are going to be taking risk questionnaires. The real question that we should be looking at is how do we get everyone on the same playing field, by getting all of the elements in the AG49 formula. Because right now the Bonuses and the Multipliers are not in where the Cap Rates and Participation Rates are.
- Fred: Anybody else?
- Sheryl Moore - re: Regalbuto. loans.
- Fred: Received 8-9 Comments Letters. Next time we'll talk about them. Items 2-8, or other information.