• ....would also like to suggest that this report deals effectively with each of the types of "malignant manipulation" suggested in Mr. Reiskytl's letter of March 26, 1979, to the Advisory Committee on Manipulation.
• If you follow a path as we just followed in these two previous examples, you will see how each of Mr. Reiskytl's problems can be dealt with in Exhibit A, B and C.

MODEL REGULATION ON PARTIAL-ENDOWMENT-TYPE ("DEPOSIT-TERM-TYPE") INSURANCE, (Exposure draft)

The nature, cause, and resolution of complaints most frequently received by insurance companies and state insurance departments

Multi-Track Policies

• Policies such as Adjustable Life or Deposit Term give the owner the option to increase or decrease the amount of insurance -- or to change or convert the plan from term to permanent or vice versa.
• We recommend that disclosure of cost indexes be required on the assumption that the option to change is not exercised, but also permit a display of indexes based on stated assumptions as to the exercise of the options.

Term Plus Annuity Combinations

• In these cases, the two coverages may be provided by separate contract -- or by a base policy and a rider.
• Dropping or changing one coverage may or may not affect the other.
• Here, as far as cost disclosure is concerned, we recommend that the Life Insurance Solicitation Regulation be applied to the term part of the package and the Annuity and Deposit Fund Disclosure Regulation to the other part.

Other Areas for Study

Policies With Adjustable Cash Value

• Several companies have introduced policies with cash values which are increased by interest at a guaranteed rate, plus excess interest at a rate which is determined by the company each year.
• For these policies, our tentative recommendation would be to require companies to disclose cost indexes based on the current cash values together with the NGE.

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History and Background of the Manipulation Problem

• Differences between the merits of a life insurance policy that (1) are genuine, and that (2) are attributed to it by the company that sells it, have always been a source of difficulty.
• When life insurance was in its infancy, there was the celebrated case of a 12-month term policy in England which the buyer's beneficiary believed to have granted protection for 12 calendar months, but which the company explained (unsuccessfully) was intended by them to expire after 12 lunar months.

At least as long ago as 1932, the word "manipulated" was publicly applied to policy structures that a critic judged to be contrary to the best interests of policyholders. That comment is to be found in Vol. XXXIII of the Transactions of the Actuarial Society of America, p. 445.

• In the heyday of the so-called traditional method of policy cost comparison, policy designers knew that the attractiveness of their product would be measured by treating dollars as of equal value regardless of when those dollars were received and paid.
• There were evident competitive advantages in policies with high premiums, high cash values and terminal dividends at the twentieth policy year customarily used for comparison, and steeply pitched annual dividend patterns.

 

• The awesome power of disclosure is frequently underestimated.
  • Not only would regulators and individual buyers see the prescribed data, agents also would see it.
  • Agents' vital role in the sales process means that their influence in discouraging manipulation should not be underestimated.
  • Competitors would see it, and also could be a powerful factor in discouraging manipulation. So would other observers of the life insurance business see it, and add their voices
  • .In short, the very act of disclosure might cause companies to refrain from manipulation.

The committee is agreed that a current buyer of life insurance is entitled, on reasonable request, to receive a quotation of premiums, cash values, illustrated dividends and death benefits for each of the first thirty years of the policy. 

• The policy duration at which an interest rate change occurs is frequently the 20th year, which also is the second of the two policy durations at which cost indexes are required to be quoted under the NAIC Model Solicitation Regulation.
• The committee is not of one mind on whether it constitutes manipulation to introduce suddenly slower cash value growth on non-participating policies by changing the interest rate ...

Concept of A Life Insurance Policy Data Bank

A national data bank, organized and operated through the auspices of the NAIC, would serve as a depository for raw data on new as well as existing policies for cooperating insurers.

It is anticipated that the national data bank would:

• The data bank would receive information directly from insurers in coded or machine-readable form.
• The format for the data would be standardized and subject to infrequent changes.
• Many companies would wish to be data contributors.

1980-2, NAIC Proceedings