On February 24th, the NAIC Life Insurance and Annuity (A) Committee (A Committee) adopted amendments to Actuarial Guideline (AG) 49-A to address a concern raised by state insurance regulators regarding the use of illustrations for indexed universal life insurance (IUL) policies with uncapped volatility-controlled indexes that allow for crediting fixed bonuses under the policies. Insurer issuers of IUL policies using uncapped volatility-controlled indexes have been able to illustrate those policies at higher rates of return than illustrations for IUL policies without volatility-controlled indexes because of the fixed bonus features.
The A Committee’s IUL Indexed Universal Life (IUL) Illustration (A) Subgroup (IUL Subgroup) recommended the amendments which are intended to implement a “quick fix” to AG 49-A to address regulators’ concern by adding a condition to AG 49-A that limits the maximum amount of leverage that could be used to illustrate IUL policies using uncapped volatility-controlled indexes with a fixed bonus. The amendments accomplish this by limiting the leverage that may be illustrated on index account options, based on the leverage on the S&P 500 benchmark indexed account (BIA). This is done by determining the leverage percentage on the BIA and multiplying that by the lesser of the hedge budget for the BIA and hedge budget for the indexed account option available under the IUL policy. The new requirements to AG 49-A apply to IUL policies “sold” on or after May 1, 2023.
For purposes of determining when an IUL policy is “sold” and subject to the new requirements, a discussion ensued regarding when a policy would be deemed to be “sold” with some A Committee members opining that a policy would be deemed sold following acceptance of the policy by the owner and payment of the required premium. Although addressed briefly during the meeting it is unclear how state mandated free-look refund periods factor into that determination.
The amendments implementing the “quick fix” to AG 49-A represent the first of a three phased effort by the IUL Subgroup to address concerns related to IUL Illustrations and life insurance and annuity illustrations more generally. They will now be sent to the NAIC Executive/Plenary Committee for final adoption on March 25, 2023, during the Spring National Meeting in Louisville, Kentucky. As AG 49-A is an actuarial guideline, most states do not have to do anything to implement the quick fix amendments and they will accept it without deviation. The second and third phases of the effort include consideration of targeted revisions to NAIC Life Insurance Illustrations Model Regulation (#582) (Model Regulation 582) or AG 49-A and recommendations for significant modifications to life insurance and annuity illustrations, respectively.
We will continue to monitor developments related to potential amendments to AG 49-A and Model Regulation 582.
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