Regulatory

NGEs – Non-Guaranteed Elements

• Non-Guaranteed Elements Work Group – NGEWG – AAA    
• 2022 – SOA – Overview of Nonguaranteed Elements (NGEs), Society of Actuaries – 22p
• ASB – ASOP – Actuarial Standard of Practice No. 2 – Nonguaranteed Charges or Benefits for Life Insurance Policies and Annuity Contracts – 16p

• The following items are typically considered Non-Guaranteed Elements in a flexible premium UL contract:
  • Monthly contract charges and policy loads
  • COI charges
  • Spreads on credited interest rates vs. the actual investment earned rate

2006 12 – Report – AAA to NAIC – Report on Valuation Effects of a Principle Based Approach (“PBA”) For Accumulation Type Universal Life, American Academy of Actuaries’ Life Reserves Work Group Modeling Subgroup – 15p

• Richard Minck, ACLI… said the most striking change in life insurance in past years was in the non-guaranteed elements.

1994-1, NAIC Proceedings

• 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

• I would say to all of you that if you think that you don’t have any customers or any agents who fail to understand what a nonguaranteed illustration really means, you’re kidding yourself.
  • And if you don’t think that you have customers out there (which means agents also) who believe that a vanishing premium illustration means that the policy becomes paid up in contractual terms, you’re kidding yourself.
  • We are going to learn by doing as we all go through this period of more and more unfulfilled policyowner expectations.

—  Walter Miller, Prudential

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

• Chalke and Davlin point out that a policy that provides whole life benefits assuming 10 percent interest is not a whole life plan if the guaranteed cash value is only 4 percent.
  • Such a plan is term insurance only for a period of years. 

—  Thomas G. Kabele

1983 – SOA – Universal Life Valuation and NonForfeiture: A Generalized Model, by Shane A. Chalke and Michael Davlin, Society of Actuaries – 72p

• I have a theory that the difficulties the life industry faced with illustrations, including the billions lost in lawsuits, stemmed from the lack of understanding of what a scale of illustrated dividends or nonguaranteed elements is and is not.

—  Hal Phillips, aka William H. Phillips, a senior life actuary with the California Department of Insurance

1998 – SOA – Current Issues in Sales Illustrations, Society of Actuaries – 26p

• The only requirement with respect to nonguaranteed elements is that a disciplined current scale be used.
  • Theoretically, there is a maximum disciplined current scale.
  • Any scale that depicts policy performance less favorable than the maximum is a disciplined current scale.
  • It seems likely, however, that many companies will tend to illustrate close to the maximum.

—  Thomas L. Bakos

1996 – SOA – Implementing the Illustration Regulation: The Clock Is Ticking, Society of Actuaries – 25p

• He questioned the appropriateness of taking non-guaranteed elements and making them guaranteed as suggested as a penalty in the white paper.

1993-3, NAIC Proceedings

• Tony Higgins (N.C.) asked the working group to consider projections into the future for only a few years of the non-guaranteed elements, and then projections further into the future of standardized assumptions or guarantees.
• Mr. Wright said this allows a company to show how its policy works without the problem of projections of non-guaranteed elements far into the future.
• Lester Dunlap (La.) .. said projections far into the future can border on misrepresentation.

1994-3, NAIC Proceedings

• NALU – William N. Albus {National Association of Life Underwriters) suggested that in each instance where the words “interest,” “interest rate” and “interest earnings” appear, the term “nonguaranteed policy elements” be substituted.
  • He said this would conform the bulletin language to the language of the NAIC Model Rules Governing the Advertising of Life Insurance.
  • After considerable discussion of the meaning of “nonguaranteed policy elements” in this bulletin, the working group decided not to accept this amendment.

1991-1A – NAIC Proceedings – p561 – Projected Interest Earnings Working Group – (A) – NAIC  —  [BonkNote]

• Up until recently, this has been a satisfactory approach since dividends were essentially the only non-guaranteed element in the marketplace.
  • This is no longer true and the Equivalent Level Annual Dividend needs to be replaced by a non-guaranteed element.
• The Non-Guaranteed Element would be the difference between the cost index on the highest possible cost basis and the cost index on the currently illustrated non-guaranteed basis.
  • For most plans, the Non-Guaranteed Element for the surrender cost index and the payment cost index would be the same.
  • However, this is not always true.
• When the elements are not the same, a separate element should be calculated for each cost index.
  • Suggestive modifications of cost indexes for various products are as follows:

—  William T. Tozer

1981 – SOA – Individual Life Insurance Cost Disclosure Issues, Society of Actuaries – 22p

• 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. 
  • The article is entitled “Future Shock” by Harry Lew with the sub-heading:
    • “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

• 1982-2, NAIC Proc. – A new exposure draft of a revised model regulation has been prepared by the staff of the American Council of Life Insurance [ACLI]
  • The following are among the principal features incorporated in the revised draft:
    • The introduction of the concept of a nonguaranteed element to measure the extent to which policy costs can be affected by premiums, benefits, or other items that are subject to change by the company without the consent of the policyholder.
    •  A special plans section to accommodate the unique features of nontraditional plans such as universal life insurance.

• Credibility of Illustrations
• (* By “non-guaranteed pricing elements,” we mean either the dividends in a traditional participating policy or any elements subject to change at company discretion – such as premiums, interest rates, and mortality charges—–in the so called non-traditional policies that have come to the fore recently.)

1987-1, NAIC Proceedings

• … could we use some of the Society of Actuaries resources to do some educational pieces, such as a videotape?
  • I’m not sure a booklet does it.
  • But a videotape that talks about the Society of Actuaries, utilizing Society of Actuaries resources.
  • We are a research body and an education body to help educate the public on why these are not guarantees, and how they should be looking at these in terms of flexibility.
  • I’m not talking about numbers now.
  • I’m talking about perceptions and concepts regarding the nonguaranteed elements of a contract.

—  Barbara J. Lautzenheiser

1992 – SOA – Life Insurance Sales Illustrations, Society of Actuaries – 16p

• Lonnie Milton Graul:  Don’t you think part of the response to the interrogatories might be the choice of the lesser of two evils?
  • An honest response might be, “The rates we are currently illustrating are not supportable because we illustrate on the portfolio rate and the portfolio rate is higher than the new money rate.
  • If everything else stays the same, the credited rate is going to go down.”
  • If you gave that answer to the question and were in a major company and your competitor or a consumer advocate gets a hold of that, they can say, “Look, they are telling you a lie.”
  • What is the alternative? — Give an incomplete answer, an incoherent answer?
    • This seems to be the norm.
  • An insurance regulator might think the answer was inadequate but that is three or four years from now when they do an examination.
• Larry R. Robinson, ACLI: You have pointed out a very real danger. 

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

• THE COURT: But they clearly describe those types of charges as non-guaranteed.
• MARTENS: Well, the question isn’t whether they’re non-guaranteed.
  • The question is whether or not they meet the statutory definition of non-guaranteed elements.
  • In other words, non-guaranteed elements is a term of art in the statute.
    • So the question, is it a premium, benefit, value, credit, or charge?  (p30)

2017 1211 – LC – Walker v Life Insurance Company of the Southwest – DOC 876 – Transcript for proceedings – 61p

• Commissioner Wilcox also spoke favorably of a new provision in California where the illustration of non-guaranteed elements must show the lesser of the amount being currently paid, the amount the company is currently earning, or the amount the company can expect to earn.

1994-3, NAIC Proceedings

• Up until 15 years ago, the deal was generally in the contract, but now, a large part of the deal is not in the contract.
  • It is outside the contract because now we have a nonguaranteed element.

—  Thomas C. Foley, North Dakota Insurance Commission, Regulator/ Actuary

1996 – SOA – Nonforfeiture Law Developments, Society of Actuaries – 23p

• 3) Since Universal Life is an “unbundled” product, the cost of each of the elements is disclosed to the buyer.
• Consumers have demonstrated their unwillingness to commit dollars to heavily loaded products.

1982 – SOA – The Universal Life Update – Society of Actuaries (rsa82v8n22) – 16p

• Our Lexington report alluded to the controversial issue of nonguaranteed policy element illustrations.
• Currently, the issue is being addressed by four different groups:
  1. this task force;
  2. the Life Insurance (A) Committee’s Cost Disclosure Task Force;
  3. the American Academy of Actuaries Task Force on Nonguaranteed Elements; and
  4. the American Council of Life Insurance’s Subcommittee on Cost Comparisons.
• For this reason, subsection 14(b) should await the consensus of opinion on this issue at the December meeting.  (p137)

—  Report of the Market Conduct and Consumer Affairs (EX3) Advisory Committee- JUNE 22, 1987

• ⇒  Rules Governing the Advertising of Life Insurance
• ⇒  Life Insurance Products Coupled with Annuities

1987-2, NAIC Proc.

• Non-guaranteed elements. The Blanks Task Force also adopted the proposed disclosure requirements concerning non-guaranteed elements developed by the Subcommittee on Dividends and Other Non-Guaranteed Elements of the Life Committee of the IASB.
  • These changes were developed in tandem with the standard in this area released by the IASB in January 1987.
  • (For more information see the article by William T. Tozer, chairperson of the subcommittee, in the January 1987 issue of The Actuarial Update).

1987 04 – SOA – NAIC Update, by Stephen G. Kelllson, The Actuarial Update – April-1987-Actuarial-Update – Society of Actuaries – p6 / 4 – 6p

• The group first considered a suggestion from Chris Kite (FIPSCO) for a new type of index that would allow consumers to compare the assumptions in the illustration.
  • Mr. Kite said his index has the advantage of prompting the prospect to question assumptions used.
  • Delmer Borah (MassMutual) suggested that consumers are more concerned about total cost than assumptions. 
  • Brenda Cude (Cooperative Extension Service) opined that the target audience does not care about assumptions. (p931)

—  1996 0815 – Report of the Cost Indices Subgroup of the Life Disclosure Working Group – (A) – NAIC

1996-3V2, NAIC Proceedings  

• 1987 01 – Actuarial Update – Non-Guaranteed Promises: A New Standard of Practice, William T. Tozer – 8p
• 1994 – SOA – The Driving Forces Behind Participating – Universal Life (UL) – Nonguaranteed Element Product Development, Society of Actuaries – 12p

• Establishes standards for determining or adjusting non-guaranteed elements for life policies and annuity contracts issued in NY

Non-Guaranteed Elements: NY Reg. 210 – Effective March 19, 2018

• What do we have?
  • In some ways, it is an industry victory; nonguaranteed elements are still allowed in illustrations.
    • I recall that at one point they were really talking about eliminating all nonguaranteed elements from illustrations.
  • 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:
      • ⇒ “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.”
  • The article goes on to say that “… veterans of the insurance industry are quietly expressing concern about the way illustrations are being used in today’s market.”
  • Often the numbers on the computer printout contain nonguaranteed projections on how the policy will perform in future years and tend to convince the client he is getting a better deal than he really is.
  • Some have gone so far as to call even well-designed illustrations the industry’s “great lie.”
  • Agents who continue to give much credence to nonguaranteed projections may be setting themselves up for a fall as policies fail to live up to the expectations of a whole generation of insurance customers.

—  Larry R. Robinson, ACLI

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

• 14. Smith did not explain to me in July (or at any other time) that the Universal Life Policy was sensitive to interest rates or crediting rates or that a decline in those rates could effect the amount of the premiums or the amount of use death benefits.
• Smith never provided me with any other illustration to show how the policy would perform at lower interest rates or crediting rates.
• Smith never discussed the possibility that additional premium outlays might ever be due, other than those illustrated in the July 1990 Lotus Spreadsheet illustration.

1999 – Spitz v. Connecticut General – Amended and Restated Stipulation of Settlement – Case 2:95-cv-03566-JFW-EX Document 249 Filed 07/29/99 Page 94 of 225

• Other illustrations were prepared which reflected the impact of declining interest crediting rates on policy lapse ages and were included in materials furnished to Mr. McCarthy.
• The July 1990 Lotus spreadsheet illustration, though, only demonstrated what would, occur under current interest crediting rates.
• No particular emphasis was placed on the possibility of interest crediting rate decline because actual rates had consistently met illustrated rate projections.

—  Statement of Agent

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 14 of 160

• 4. Proposed Adoption of Amendments to Model Rules Governing the Advertising of Life Insurance
• Dick Rogers (Ill.) presented a report on behalf of the Life Insurance Advertising Issues Subgroup.
  • He indicated that the model had been exposed for nearly a year and is presently ready for adoption (Attachment Two).
  • Mr. Rogers indicated that several minor amendments had been added to the draft since Pittsburgh meeting on Sept 13.
  • He stated that the language at Section II, paragraph 6 regarding “Nonguaranteed Policy Element” may be in need of further study.
  • While Mr. Rogers indicated that the language was acceptable and intended, recent discussions have indicated that there may be potential loopholes that will be created.
  • He asked that it be noted specifically that it was the intent of the subgroup to re-examine the language but that it should currently stand for adoption at this time.

198x?, NAIC Proceedings

• Section 4.  Definitions
• D. “Nonguaranteed elements” means the premiums, credited interest rates (including any bonus), benefits, values, non-interest based credits, charges or elements of formulas used to determine any of these, that are subject to company discretion and are not guaranteed at issue.
• An element is considered non-guaranteed if any of the underlying non-guaranteed elements are used in its calculation.

NAIC – LIFE INSURANCE DISCLOSURE MODEL REGULATION

• Richard Minck (American Council of Life Insurance — ACLI) …. suggested having examples of what illustrations would look like with past performance and future guarantees to see if this was what the working group intended.
  • He said the most striking change in life insurance in past years was in the non-guaranteed elements.

1994-1, NAIC Proc.

• What I’m thinking about in particular is, Universal Life companies, back in the early 1980s, were illustrating interest rates that we all knew were not realistic long-term.” 

—  Kevin A. Marti

1995 – SOA – Practical Illustrations and Nonforfeiture Values, Society of Actuaries – 14p

• The thrust of this development says the deal needs to be articulated.
  • This deal has several components, and one is with respect to premiums.
  • If they are not guaranteed or fixed, there needs to be an understanding of how they can vary. 

—  Walter S. Rugland

1996 – SOA – Nonforfeiture Law Developments, Society of Actuaries – 23p

• The difference in these two indexes would be the Non-Guaranteed Element. 

—  William T. Tozer

1981 – SOA – Individual Life Insurance Cost Disclosure Issues, Society of Actuaries – 22p

•  William Albus (National Association of Life Underwriters — NALU) said:
  • … there was a need to illustrate non-guaranteed elements, but consumers must understand that they are not guaranteed.
  • He thought it was a good idea to tighten up the parameters of assumptions.
  • He said his group was working on the concept of a sensitivity index to allow consumers to see what would happen when assumptions changed to a small degree.

1993-3, NAIC Proceedings

• New York Insurance Regulation 210
• … went into effect in New York on March 19, 2018.
• … establishes standards for the determination and any readjustment of non-guaranteed elements (“NGEs”) that may vary at the insurer’s discretion for life insurance policies and annuity contracts delivered or issued for delivery in New York.
  • Examples of NGEs include cost of insurance for universal life insurance policies, as well as interest crediting rates for annuities and universal life insurance policies.
• The regulation requires insurers to notify policyholders at least 60 days in advance of any change in NGEs that is adverse to policyholders and, with respect to life insurance, to notify the NYDFS at least 120 days prior to any such changes.
• Additionally, the regulation requires insurers to file annually with NYDFS to inform the NYDFS of any changes adverse to policyholders made in the prior year.
• The regulation generally prohibits insurers from increasing profit margins for in-force policies or adjusting NGEs in order to recoup past losses.

2018 1231 – Metropolitan Life Insurance Company, Form 10-K, For the fiscal year ended December 31, 2018 – sec.gov/Archives/edgar/data/937834/000093783419000006/mlic-12312018x10k.htm

• Jack Turnquist, ASB, Actuarial Standards Board) said
  • …his organization had held a public hearing in March because of concern about abuses in illustrations and concerns about how non-guaranteed elements were being illustrated.

1993-4, NAIC Proceedings

• The accuracy of these projections depends, among other factors, on how well the assumptions and estimates represent actual experience in the future.”  (p9)

Book – Statutory Valuation of Individual Life and Annuity Contracts | 5th Edition, Claire, Lombardi and Summers

1.  Actuarial
   • AAA – American Academy of Actuaries
     • Non-Guaranteed ElementsWork Group
   • ASB – Actuarial Standards Board 
     • ACTUARIAL STANDARD OF PRACTICE NO. 2- Nonguaranteed Elements for Life Insurance and Annuity Products
       • https://www.actuarialstandardsboard.org/asops/asop-no-2-nonguaranteed-elements-for-life-insurance-and-annuity-products/
   • SOA – Society of Actuaries
     • 1980 – SOA – Nonparticipating Life Products with Nonguaranteed Premiums (rsa80v6n22), Society of Actuaries – 18p
       • “How many actuaries would feel comfortable assuming a 9% interest rate over the next 20 years, if the premium rates were guaranteed?”
     • 2022 – SOA – Overview of Nonguaranteed Elements (NGEs), Society of Actuaries – 22p
2. Government
   • Federal
   • State
     • New York: LIFE INSURANCE AND ANNUITY NON-GUARANTEED ELEMENTS, (INSURANCE REGULATION 210)
       • https://www.dfs.ny.gov/docs/insurance/r_finala/2017/rf210txt.pdf

3. Industry
   • ACLI
     • 1981 – SOA – Universal Life (RSA81V7N412), Moderator: Samuel H. Turner, Ben H. Mitchell, Society of Actuaries – 16p 
       • • “In addition, the Subcommittee [ACLI Subcommittee on Cost Comparisons] is recommending disclosure for Universal Life plans in accordance with the “non-guaranteed cost element” concept endorsed by the Council as a modification to the model regulation. The only special requirement recommended for Universal Life plans is that the Policy Summary indicate when the plan will terminate based on guaranteed assumptions.” 1981, “Universal Life,” 1981, Society of Actuaries
     • 1988 – SOA – Actuarial Opinion on Non-Guaranteed Elements, Society of Actuaries – 12p
       • “The most obvious is if we fail policyholder expectations, we may have policyholder suits.”  — LARRY R. ROBINSON (Chairman of the ACLI Subcommittee on Cost Comparisons)
     • 1994-1, NAIC,roceedings – “He [Richard Minck – ACLI] said the most striking change in life insurance in past years was in the non-guaranteed elements.” 

4. Law
5. Insurance Regulatiors / NAIC
   • 1994-3, NAIC Proceedings
     • “Commissioner Wilcox also spoke favorably of a new provision in California where the illustration of non-guaranteed elements must show the lesser of the amount being currently paid, the amount the company is currently earning, or the amount the company can expect to earn.”
     • “4. Discussion of Model Limited to Illustration of Guarantees and Past Performance”
     • Assumptions.
       • Non-guaranteed elements will be based on separate assumptions for interest, mortality, lapse and expenses that are each not greater than the most conservative of:
         1. The rate reflected in the current credited scale;
         2. The most recent experience on the policy block; and
         3. The rate that can reasonably be expected on the policy block.

• 1996 – SOA – Nonforfeiture Law Developments (rsa96v22n38pd), Society of Actuaries – 23p
  • “Tom Foley [Regulator] : “Up until 15 years ago, the deal was generally in the contract, but now, a large part of the deal is not in the contract. It is outside the contract because now we have a nonguaranteed element.”
  • “Mr. Gorski [Regulator] :  They are complaints about things that we can’t do anything about because the contract might be a Universal Life type product with Nonguaranteed Elements, and there is no regulatory framework to deal with those issues. Those complaints just fall by the wayside because there is nothing that can be done. I think that the bottom-line suggestion is that nonguaranteed elements should be regulated (and I am using the word “regulated” in a very general sense) through this plan approach.”  

6. Other
   • Google Search Results – About 76 results

• OLD
  • 1877 – The International Review: Volume 4 – “The rate of interest at which the company computes that its funds will accumulate is not the current rate in the community, but a rate so low that it can be surely obtained as a minimum for generations to come.
    • But the probabilities in any case are very great that, with good management, the mortality will be indefinitely less, the expenses less, and the interest greater than the estimates. The probability that all these margins will be lost, under such management, is inconceivably small.”

Documents

1978-2 – Life Insurance (Policy Lapsation (C3) Advisory Committee

1951 – LAPSE RATES – Society of Actuaries – CHARLES F. B. RICHARDSON, JOHN M. HARTWELL