Illustrations

2019 0528 – IULSG – IUL Illustration Subgroup – (A) – NAIC

• 1/ – Fred – LIAC – IUL Illustrations – concerns features may not be working as intended, Bonus and Multiplier features, Crediting Rate, AG49 Limitations, Cash Values, Target premiums.. is a desire to change…. 2019 04 meeting- Menu of Options, Comments from …, Evaluating Menu Options. Today… Menu – Disclosure Based, Beyond Disclosure (Items that could impact Illustrated or DCS at sale).  Group of Experts to write disclosure items or work on big ticket items.
• Tomas – Disclosures are not an actuarial item. Experts good idea. start with items that can change the illustration. parallel track… somebody looking at Disclosure.  
• Mike Y (??) – 
• Fred – 
• John – Focus on B’s.  
• Regalbuto – ….  illustration are 20 pages long. What does AG49 require, “disclosure based of what the consumer needs to know and how these policies are illustrated” .  what are the key points we are disclosing.
• Fred – delay working on disclosure…?
• Mike Y – B’s are the focus.
• Regalbuto – pressure from LIAC.  Industry implementation. 
• Fred – Goes through Menu of Options – D’s / B’s – Level Playing Field, Cash Value, AG49 Constraints, 
• 3/  – Mike (TX-Chair of LATF-??) – X’s in the right spot. Model Reg 582 – 
• Regalbuto – LIAC needs to rely on the expert. AG guidelines much harder to bring enforcement actions. AG’s are not the way to regulate an industry.
• -Mike (TX) – ?? — not all AGs are created equally.
• Craig (VA) – Benefits, pros and cons, disclosure balanced with simplicity, do people read illustrations now?  may make illustrations less valuable.
• John (MN) – 
• Scott Harrison – potential to be wide ranging. “Still not clear to us exactly what problem we are trying to solve here.” Lack of focus. Parallel Track. re: Craig (VA), Simplicity… Taking on a lot. Parallels to Annuities. Opening up Annuity Disclosure?  What problem or problems are we trying to solve…. 
• Fred:  “I think the easiest way to express the concern of some parties is that their belief was that AG49 should have lead to an accumulated value at a certain duration of $100,000 and now some companies are showing $120,000.   And their is a perception that those companies  are getting more of the market share now.  And there is also concern that it might be optimistic for consumers as far as what target premium they need to pay to achieve certain goals. So its a Market place issue as well as a consumer protection issue.”  
• Scott Harrison – This is what happens in an innovative environment. relook at regulations made in the past.  “Innovative business practice is normal and the kind of thing that we want to encourage in the industry.” Regulatory standards need to keep pace, we agree.
• Birny Birnbaum (CEJ) – The way you described the problem, you referred to them as perceptions. They are not perceptions, they are reality. When AG49 was created there was a concern that consumers were being given unreasonable, unrealistic illustrations.  Crediting rates that weren’t realistic or reasonable.
  • Since AG we’ve now seen products developed specifically for Illustrations or juicing the illustration. That’s not what I call innovative products, that’s what I call gaming the system. And as you said we have products now that even though the crediting rate is lower than it was before, we have accumulation values that are higher and expenses that are higher. Something doesn’t add up there. This is a crisis. People are being sold products that are clearly misleading, clearly creating unrealistic expectations. We have seen this again and again in this industry.  Whether it’s with Universal Life and Vanishing Premium. Whether it’s with Long-term Care Insurance. Regulators have to got to act quickly on this. And there are some issues that could be addressed be on a prop basis AG49.  I agree that we focus on those big ticket issues and try to blanche the bleeding at this point.  In terms of a longer-term solution, I agree that this needs to move to a regulation, and there are certainly opportunities to improve illustrations generally, but I think that’s a longer-term project than addressing the current crisis. 
  • And the last point that I want to make has to do with disclosures. The absolute last thing we need is another disclosure in this 20-page document that consumers are given.   What might be needed is a complete overhaul of the illustration based on some expert analysis of consumer comprehension and consumer understanding.  But the idea that layering on another disclosure is somehow going to help consumers is so off the mark it’s hard to describe.  Given that any of the critical disclosures are going to be a function of what happens on the critical features, I don’t think it makes much sense working on disclosures at this point in time unless that parallel track is looking at a significant revamp of illustrations generally in a way that makes the disclosure a lot more meaningful and comprehensible than the current approach.
• Fred – change to AG49 or illustration model?
• Birny – Change to the model Regulation. Better consumer comprehension and understanding. Smaller pieces that are more meaningful and cut out info that is misleading and distracting. I don’t think that you can reasonably do that in current illustration model framework. “For example, the framework is designed that consumers will be multimillionaires 20, 30 years down the road. What needs to happen is that they need to understand that they are buying insurance. And they need information about what the cost is going to be ……Benefits / Costs. Right now it’s being pitched as something else. I think there’s some . I’m happy to work on that on a parallel path, but not additional disclosure. That doesn’t make sense at all.
• Scott Harris – We really take exception to Birny’s characterization of misleading conduct.  We’ll have the opportunity to comment and express our views.  Also I just want to point the illustrations are, in fact, accurately demonstrating how the products function.  To Birny’s point that the companies are doing what the model requires, so be it.  The reality is the illustrations are demonstrating how the products function.  We do agree that effective disclosure is important. We are interested in simplification of how products are illustrated. We want consumers to have the best information presented in a meaningful way.
• Tomasz Serbinowski – Actuary(UT) – I think that’s completely disingenuous what was just said. That was the main purpose of the illustration, main purpose to show how the product works. ….{of 2% or 3%} rate. The whole issue is whether the values are realistic or not.  And that’s why we had that whole discussion.  It’s not that the companies want to show how the features and how the product works. I disagree with that comment. If that was that the main objective, then we would have no problem agreeing on illustrating the future at a much lower value.
• 5/5 – Regalbuto  (NY) – smart people on this call, pull together information if AG49 is supportable, 65 year time horizon, right / wrong way to illustrate.  Empirical support-?, we don’t think it is. 
• Fred – LIAC – concern – is AG49 working the way it’s intended.  
• Birny – can people add wording . re: Regalbuto – 
• Regalbuto – “What I’m hearing from industry is that everything is fine and that there is no problem.   So, if anything we will add an additional disclosure.
  • I’m saying that that does not address the underlying issue from A [LIAC], which is is this working as intended. And I think the answer to that is clearly no. 
  • because it’s allowing products that are indexed fixed life products able to illustrate IRR’s commensurate with securities.  I think the answer to that is clearly no. illustrate Indexed fixed life products commensurate with securities. That to me is the fundamental problem.”
• Fred – “James, I’ll just mention that from the feedback that I’ve received, industry is all over the map on this. Scott Harrison is representing a certain number of companies, but there are many other companies with different views.”
• Regalbuto – “I appreciate that, I think it would be good if some of those other companies would speak up everyonce in a while.”
• 6/6 – Craig (VA) – Enhanced Participation Rate…. seems equivalent to Enhanced Credit Multiplier…. but would be illustrated differently.  Seems same, just packaged differently. Company interpretation.  Can anything be shown to the group, that would be helpful.
• Fred – one company has offered to demonstrate to regulators how their illustration works.
  • next steps – Items 14-.   

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 Andersen:
  • 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.”
        • [Bonk: ? – SEC – Variable Life – Monarch Life – 12% – ?]
      • 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 dependent 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.