Agents

Performance

• Benefits
• Coverage Period
• Historical Performance

• Results
• Outcomes
• 2000 – AP – The Nature and Causes of Variation in Insurance Policy Yields: Whole Life and Universal Life, Journal of Insurance Issues, 2000, 23, 1, pp. 30-47, by James M. Carson and Mark D. Forster – 18p

• The actual versus expected performance for some Universal Life policies led to class-action lawsuits that have caused a substantial amount of negative attention to be focused on cash-value life insurance in the illustration of projected values. 

— Deanne Osgood, Milliman & Robertson

1999 – SOA – The Next Generation Universal Life, Society of Actuaries – 30p

• I am on this panel principally as Chairman of the ACLI Subcommittee on Cost Comparisons.   
• Much of our work has dealt with the issue of illustrating Nonguaranteed Elements.
• As a backdrop, I want to quote from a January 1988 Financial Planning article.
  • The article is entitled “Future Shock” by Harry Lew with the sub-heading: <WishList>
    • “What will happen when a generation of insurance buyers begins comparing unrealistic illustrations with the actual performance of their policies?
    • Industry leaders would prefer not to find out.”

—  Larry R. Robinson, Chairman of the ACLI Subcommittee on Cost Comparisons

1988 – SOA – Actuarial Opinion on Non-Guaranteed Elements, Society of Actuaries – 12p

• 1997 0828 – NYT – For Plaintiffs, More of Same in Insurance Accords, By Reed Abelson – [link]

• Risks to Buyer
• If assumptions change adversely investment performance can affect satisfaction of long-term goals and cash value can be lower than with Traditional products. (p99)

1987 – Book – Life Insurance, Huebner, Black, Skipper

• American Academy of Actuaries  – “Because NGEs are likely to change, the ongoing performance of products with NGEs should be reviewed periodically after purchase to assess the impact of any NGE changes and consider actions that policyholders may wish to take (e.g., adjust premium payments or death benefits).”
• Brenda Cude (Consumer Representative / University of Georgia) said the issue of NGEs is interesting, but not something the average consumer would understand.
  • She did not think it was information that was appropriate for a short guide for first-time purchasers.
  • Mary Mealer (Missouri Insurance Department) – …also agreed that this was an important topic probably best addressed in the online tool.
  • [Bonk: NGEs = Non-Guaranteed Elements

2017 1106 – LIBGWG – Life Insurance Buyer’s Guide Working Group – NAIC Conference Call – Proceedings

• …..in particular, the impact consumer payment patterns have on the performance of the product.  

—  Assurity White Paper – 11p 

2016 0517, NAIC Proceedings – Life Insurance Illustrations Issues Working Group Conference Call

• C. Universal Life
• From the beginning, a necessity for successful marketing of Universal Life has been the ability of the seller to illustrate the performance of a policy tailored (within policy limits) to the needs and resources of the prospective purchaser.
• The agent and prospect have the ability to choose almost any pattern of benefits and premiums.
• No longer is the sale limited to one of several fixed plans of insurance from a ratebook.
• Each one is different.

1991-1992 – SOA – Final Report of the Task Force for Research on Life Insurance Sales Illustrations, Society of Actuaries – 142p

• At the 1986 Annual Meeting of the American Council of Life Insurance ACLI Chairman John Pearson stated:
  • Our products must do what we say they do.
  • Our companies must fulfill their promises.
  • All the words in the world- the best government relations, the best public relations-will not be enough without performance.  (p2)

1987 01 – SOA – Non-Guaranteed Promises: A New Standard of Practice, William T. Tozer, Actuarial Update, 1987-AU – January 1987 Actuarial Update – Society of Actuaries –  8p

• (p293) – The inability to evaluate policy performance in the normal course of owning the policy seems to be fundamental to any theory of informational market failure in this market.
  • The survey evidence cited above suggests that policyholders do not understand how to evaluate the dual savings/protection pay in advance life insurance contract.
  • They neither know nor realize the economic importance of cash values, dividends and the policy loan interest rate. 
  • None of the usual market institutions that help buyers cope with complexity, expert “agency” ‘or firm reputation, will work unless buyers can and, with some frequency do, evaluate the product and the services supplied by sales agents. 

1985 11 – FTC – Report – Life Insurance Products And Consumer Information, by Michael P. Lynch and Robert J. Mackay,  Staff Report Bureau of Economics, Federal Trade Commission  —  [BonkNote]  —  317p

• I think what’s happened is that in the mid 1980s, interest rates were the highest they had been in this century, but they came down, and we all know that a universal life or a traditional participating policy’s performance is very dependent on the level of interest. 

—  Tom Bakos

1995 – SOA – Current Developments Surrounding Regulations and Standards of Life and Annuity Products, Society of Actuaries – 18p

• (p1/30) – The advent of new products naturally leads to the question of the relative performance of traditional products versus the “cutting edge” products of the day.
  • For example, universal life in the 1980s and variable life in the 1990s became the policies of choice (as opposed to whole life) for millions of insurance buyers. 
• (p12/41) – IMPLICATIONS OF THE STUDY
  • Many individuals remain unaware of the wide variation in life insurance policy performance (cost), both within and across policy type. 

2000 – AP – The Nature and Causes of Variation in Insurance Policy Yields: Whole Life and Universal Life, Journal of Insurance Issues, 2000, 23, 1, pp. 30-47, by James M. Carson and Mark D. Forster – 18p

• “Mrs. Vogt’s testimony reveals that the Vogts’ actual grievance with the policy performance arose from their agent’s alleged oral representation in 1999 that if they paid a $150 premium each month, their $100,000 policy would remain in force and would never lapse. (Ex. A at 17:17-20:12.)”

2016-2020 – Legal Case – Vogt v State Farm

• The agent said that Universal Life policy premiums would stay the same, but I came to realize that this is not true of our policies.
• …what bothers me is that I am afraid that this same misleading information may be the basis of my children’s and grandchildren’s … planning…

—  Statement of Gloria Darleen Newberry

1993 0525 – GOV (Senate) – When Will Policyholders Be Given The Truth About Life Insurance? – [PDF-354p-GooglePlay, No Video]->Not on govinfo.gov 

• I am on this panel principally as Chairman of the ACLI Subcommittee on Cost Comparisons.   
• Much of our work has dealt with the issue of illustrating Nonguaranteed Elements.
• As a backdrop, I want to quote from a January 1988 Financial Planning article.
  • The article is entitled “Future Shock” by Harry Lew with the sub-heading: <WishList>
    • “What will happen when a generation of insurance buyers begins comparing unrealistic illustrations with the actual performance of their policies?
    • Industry leaders would prefer not to find out.”

—  Larry R. Robinson, Chairman of the ACLI Subcommittee on Cost Comparisons

1988 – SOA – Actuarial Opinion on Non-Guaranteed Elements, Society of Actuaries – 12p

• ….provide illustrations based on different assumptions.
• This would serve to demonstrate to the consumer the effect on future benefits of changes in assumptions.”  (p177)

— 1988 0613 – Statement on Behalf of the American Council of Life Insurance (ACLI) to the NAIC Market Conduct Surveillance (Ex3) Task Force 

1988-2, NAIC Proceedings

• Mr. Schwartzer reminded the Working Group that the Life Insurance Illustration Issues (A) Working Group came out of concerns raised when the Indexed Universal Life (IUL) Illustrations (A) Subgroup under the Life Actuarial (A) Task Force was working on guidance for IUL policy Illustrations that 
  • …  would result in consumers being better able to understand the product performance and interest variability of IUL products.

2016 0403, LIIIWG CC – NAIC Proceedings

• If illustrations do not adequately convey the likely performance of the underlying contracts, various parties to the insurance transaction suffer:
  • insurers and insurance professionals who rely on illustrations in sales presentations may increase their exposure to liability, 
  • policy owners who rely on illustrated values to achieve financial goals may fail to reach their goals and be forced to seek other means.
• In addition, the insurance industry risks losing the confidence of insurance professionals, financial service professionals, and consumers.
• Thus, if illustrations do not adequately convey the likely performance of life insurance contracts, then an alternative form of disclosure may better serve the interests of consumers, insurers, insurance regulators, and insurance professionals.

1997 – JIR / NAIC – An Analysis of Life Insurance Illustrations: Regulatory Implications of the Disparity between Policy Yields Based on Illustrated Versus Actual Surrender Values, by James M. Carson and Mark D. Forster – 23p

• II. REGULATORY REQUIREMENTS FOR LIFE INSURANCE ILLUSTRATIONS
• The policy performance and features illustrated to the buyer have been an issue with regulators for at least a century.
• The purpose of these illustration requirements is to ensure that both the guaranteed and nonguaranteed performance of the policy are disclosed to the buyer.  

1991-1992 – SOA – Final Report* of the Task Force for Research on Life Insurance Sales Illustrations, Society of Actuaries – 142p

• Appendix II – Illustration Examples

• THOMAS L. BAKOS: I have perhaps a more simplistic view of what’s going on with respect to illustrations and their acceptability.
  • I think what’s happened is that in the mid 1980s, interest rates were the highest they had been in this century, but they came down, and we all know that a universal life or a traditional participating policy’s performance is very dependent on the level of interest.
  • Interest rates came down and policies issued in the 1980s did not actually perform as well as they were illustrated.
  • If you go back a little further, policies issued in 1970 or 1975 are performing better than illustrated, and no one is complaining about the inaccuracy of illustrations in that situation.
  • So it seems to me that the basic problem is that interest rates have come down, and people don’t like the way their policies are performing versus how they were illustrated.
  • You can modify rules and regulations and certainly there are some abuses in illustrating life insurance products that should be corrected, but I think the only thing that will eliminate this problem altogether is if interest rates start going up again.

1995 – SOA – Current Developments Surrounding Regulations and Standards of Life and Annuity Products, Society of Actuaries – 18p

• Please also tell us what documents or information you were given after you had applied for coverage, including documents or information provided at the time your policy was delivered to you. 
• For example, were you given an illustration, ledger, or written explanation of policy performance with your policy?

1999 – LC – Spitz v Connecticut General – Amended and Restated Stipulation of Settlement

Case 2:95-cv-03566-JFW-EX Document 249-1 Filed 07/29/99 Page 39 of 160

• Mr. Morgan also asked what percentage a field agent was allowed to use in an illustration and Mr. Nelson responded that it could not be larger than what was currently being paid, but in a declining market that may not be a valid projection of future results.  (p251)

1993-1, NAIC Proceedings

• Mr. Morgan – Noel Morgan (Ohio)
• Mr. Nelson – an insurance agent from Nebraska who is chair of the National Association of Life Underwriters Sales Illustrations Task Forc

• This was an optional idea that we called “Illustrations As Road Maps.”
• The concept is that instead of letting the actual performance of a Universal Life policy diverge over time further and further from what was originally illustrated, you could send policyholders a notice each year on the anniversary, if the results are below what was illustrated.
• A letter would state the need to pay an additional amount to get back to what was illustrated, because interest rates are lower. This would have two advantages.
  • First, it would keep people on track with their illustrations.
  • Second, it would help people understand the workings of their universal life policy.” 

—  John Keller, Northwestern Mutual Life Insurance Company

1991 – SOA – Illustrations, Society of Actuaries – 20p

• If your training process for your agents is to sell at target premium, for example, and target premium carries the policy to maturity at a 7 percent rate, if you’re only crediting 6, it’s not making it there.
• So keep an eye on how you’re training your agents to sell your products and try to avoid problems up front in the product performance before they become a premium risk problem.

—  Joseph E. Paul, Clarica Life Insurance Company, Vice President and Pricing Actuary

2001 – SOA – Investment Strategies to Maximize Investment Yield, Society of Actuaries – 25p

• Created during the early 1980’s, the original UL Life Insurance product calculated premiums based on reduced current mortality rate assumptions and historically high current interest rates.
  • This resulted in significantly lower premiums relative to Traditional Cash Value Insurance.
• …the original reduced UL premium was financially insufficient to pay the increasing cost of insurance associated with decreasing policy cash values, causing the polices to lapse prior to maturity.

2011 – AP – Universal Life Insurance Duration Measures, by David Lange, Peter Alonzi and Betty J. Simkins – 14p

• One thing that has exacerbated the problem of disappointed policyowners accompanying the flow of market interest rates is that this immediately followed almost a 30-year period when, as you correctly commented, everything went up. Every company had its own version of a mountain chart.
• Here’s a policy we issued 20 years ago, here’s what we originally illustrated, and here’s what we actually paid. At least a generation and one half of life insurance agents, field people, even home office people and their customers grew up thinking that a mutual company would never pay dividends less than what was illustrated.
• As that sunk in, collectively we forgot to talk about the fact that dividends weren’t guaranteed. We very seldom made that point up front during the sale near the end of that period when things were about to turn around.
• We never showed alternate illustrations at less favorable interest rates to show the potential volatility of policy performance if conditions change.

— Walter N. Miller

1995 – SOA – Current Developments Surrounding Regulations and Standards of Life and Annuity Products, Society of Actuaries – 18p

1. Academic
   • UW-Madison – Center for Actuarial Excellence Project
     • instruction.bus.wisc.edu/jfrees/UWCAELearn/default.aspx

2. Actuarial
   • SOA

     • “I think you really have to make sure that people understand volatility, whether you solve for a policy blowing up or values being halved. I think you have to catch people’s attention, and that is all to the good.”

       —  Mr. Coleman (Prudential) Technical Resource Group (NAIC),

       1994 – SOA – Problems and Solutions for Product Illustrations, Society of Actuaries – 28p

3. Government
   • State
     • Texas – Video
       • youtube.com/watch?v=iw1GQRSZNZw
     • “Current assumptions are critical to interest sensitive products such as Universal Life. When interest rates are high, benefit projections (such as cash value) are also high. When interest rates are low, these projections are not as attractive.” – dfs.ny.gov/consumers/life_insurance/types_of_policies

4. Industry
   • At the 1986 Annual Meeting of the American Council of Life Insurance ACLI. Chairman John Pearson stated:
     • “Our products must do what we say they do. Our companies must fulfill their promises.

All the words in the world­ the best government relations, the best public relations-will not be enough without performance.” – (p2)

1987 01 – SOA – Actuarial Update – Non-Guaranteed Promises: A New Standard of Practice, William T. Tozer – 8p

4. Law
   • Legal Cases
     • 1998 – Friedman v Manufacturer’s Life
     • 2010 – Blumenthal v New York Life
     • 2018- Vogt v State Farm

       “Mrs. Vogt’s testimony reveals that the Vogts’ actual grievance with the policy performance arose from their agent’s alleged oral representation in 1999 that if they paid a $150 premium each month, their $100,000 policy would remain in force and would never lapse. (Ex. A at 17:17-20:12.)”

6. NAIC Proceedings

   • 1994-3, NAIC Proceedings – Wright / Nelson

     • Mr. Wright <Commissioner> asked what sensitivity testing would achieve that standardized illustrations did not.

     • He said the purpose of both was to show that there could be a variable result.

       Mr. Nelson <NALU / NAIFA> said it was important to sensitize consumers to the inevitability of change.”

   • 1994-3, NAIC Proceedings

     • Ed Coover (National Travelers Life) said the problem was explaining to consumers that the illustration was only a snapshot.

     • He suggested using the annual review to show how circumstances change.