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Consumer Reps Ask States to Change Annuities' Faces

By Allison Bell

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What You Need to Know

  • One target: New investment indexes designed to have unrealistically high historical returns.
  • Another target: Vagueness about the ability of the issuer to change index return caps and floors.
  • A proposal: A table that would show how product features would perform in five standard scenarios.

Two longtime consumer advocates are renewing efforts to make hypothetical performance illustrations for life insurance and annuity products uglier.

For clients, illustrations serve as products’ easy-to-understand faces.

Birny Birnbaum and Brenda Cude are preparing to talk to state insurance regulators on Sunday about ways to put products in what they believe to be a more realistic, blemish-revealing light, at a session of the National Association of Insurance Commissioners’ Life Insurance and Annuities Committee.

Birnbaum and Cude will talk about the collision between clients’ lack of financial literacy and what they say is the overly pretty nature of many of the illustrations. The consumer reps are especially concerned about products with returns linked partly or wholly to the performance of investment indexes.

They want to block illustrations based on new investment indexes with unusually high 10-year returns, and they want to create a standardized chart or other tool that will show clients how index caps, index participation rates and provisions letting insurers change the caps and floors might affect product returns.

What it means: While the U.S. Department of Labor is working on an investment advice fiduciary definition and other regulations that could require agents to provide detailed compensation information when they help clients roll retirement plan assets into annuities or life insurance policies, state insurance regulators will be hearing concerns about product disclosures.

The NAIC: The federal McCarran-Ferguson Act of 1945 leaves insurance regulation to the states.

The NAIC is a Kansas City, Missouri-based group that helps the top insurance regulators in states and other jurisdictions, such as the District of Columbia and Puerto Rico, share information. The NAIC develops model laws, regulations, bulletins and other documents, and state legislators and regulators decide whether and how to use the models.

The NAIC has a program that gives insurance educators, advocacy group representatives and others a chance to serve as official representatives for consumers’ interests in NAIC deliberations.

Birnbaum, who is executive director of the Center for Economic Justice, and Cude, who is a professor emeritus at the University of Georgia, both serve as funded consumer liaison representatives. The NAIC helps funded reps participate in NAIC meetings by reimbursing each of them for up to $5,500 in travel expenses.

The history: Regulators and consumer reps have been working on efforts to improve illustrations for years. In 2015, the NAIC approved Actuarial Guideline 49, a set of model illustration requirements for indexed universal life products.

Since then, the NAIC has adopted an update, Actuarial Guideline 49-A, and an update to the update.

Actuarial Guideline 49 created a standard approach for calculating an indexed universal life product’s rate of return.

Actuarial Guideline 49-A limits the ability of an IUL policy issuer to use special policy features, such as bonuses, to increase the policy’s illustrated rate of return.

The update to Actuarial Guideline 49-A keeps an IUL policy issuer from using a volatility-controlled index and a fixed bonus to boost a policy’s illustrated rate of return.

LifeTrends, a life insurance data company, posted a spreadsheet showing that the guidelines decreased maximum illustrated returns for some policies by more than 1 percentage point but led to small increases in illustrated returns for some other policies.

The NAIC Life Insurance Annuities Committee came close to shutting down a panel that was working on IUL illustration rule updates, the Indexed Universal Life Illustration Subgroup, because of concerns about a lack of regulator agreement on how to move forward, but the committee ended up keeping the subgroup in operation.

The new presentation: Birnbaum and Cude’s new presentation relies partly on points about reengineering life and annuity illustrations and other disclosures that Birnbaum made during a talk in November 2020.

They also draw on an article about investment index design by Bobby Samuelson and a paper about the weaknesses of disclosure-based consumer protection efforts that was created by the Australian Securities and Investments Commission and the Dutch Authority for the Financial Markets.

Samuelson suggested that index designers have created indexes that look unusually good in 10- and 20-year historical illustrations but seem unlikely to perform especially well in the future.

The Australian and Dutch team argued, based on research on consumers’ use of many types of advisors and disclosures, including mortgage loan advisors, that disclosure requirements may backfire, by causing high-risk advisors who provide the disclosures to seem more trustworthy.

“Re-engineer illustrations regulations for a consistent approach for indexed annuities and life insurance,” Birnbaum and Cude tell regulators in their new presentation, which is included in a meeting document packet. “Eliminate hypothetical historical results and projections of non-guaranteed outcomes.”

Eliminating both outcomes will improve the illustrations and reduce the odds that insurance agents and brokers will end up acting as financial planners without having the training to do so, the reps say.

Birnbaum and Cude have included what they hope could be a simpler, more complete tool for showing how products will work: A set of two tables that would show how 12 product variables would perform in very bad markets, very good markets and markets where investment indexes changes just a little or stay the same.

This image shows two six-column charts. In the first column of each chart, we see 12 product variables of interest to clients. The next five columns show what happens when the index increases by 3% increases by 15%, holds steady, falls by 3% or falls by 15%. The first chart includes four of the 12 variables and shows account value figures. The four variables there are product value at start of period, change in value from changes in index inclusive of all policy features, change in value from policy fees or any charges, product value at end of period, The second chart gives cumulative percentage change figures for eight variables: Change in value from changes in index, caps and floors, participation rates, multipliers and bonuses, two other features;, change in value from policy fees and other charges, and total change in product value at end of period. Credit: Center for Economic Justice

If an annuity or life insurance policy issuer can change an important performance-related parameter, such as return caps or participation rates — the percentage of index gains that flow into a client’s own product returns  — the issuer should also show how how it has handled those types of parameters for all of its products in the past, the reps say.

They note that the product performance tables, which were developed by Birnbaum, have not yet been consumer-tested and would need to be to see if they would work.

The ferment: Larry Rybka, the chairman and CEO of Valmark Financial Group, who has been writing about problems with unrealistic indexed life and annuity product illustrations for years, is getting enthusiastic responses from life and annuity professionals for his LinkedIn posts about the topic.

In October, for example, Rybka argued in a post that the maximum rate included in indexed universal life policy illustrations should be 5%, rather than the 5.5% default illustrated rate included in Actuarial Guideline 49, because alternations of good years, when rates are capped, with down years, when investment-linked additions to the crediting rate are zero, mean that the actual rate will affect actual returns and hold actual returns below the default rate.

Many life and annuity professionals replied with comments about their own concerns about the high rates they see in illustrations.

But other participants in the conversation, including regulators at the NAIC, have questioned whether the critics’ proposals would work better than the rules and disclosures now in use.

Credit: vetta/iStock

Allison Bell

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