On August 14, at its all-virtual summer national meeting, the National Association of Insurance Commissioners (NAIC) adopted guidance governing illustrations for index-based life insurance. In a key development, New York voted no on the proposal, which was taken up at the NAIC’s Executive Committee / Plenary session.
Issuers of these products should take immediate steps to align their illustrations with the new guidance (codified as Actuarial Guideline XLIX-A), which takes effect in November 2020. Carriers offering these policies in New York may wish to consider the significance of that state’s opposition. At the meeting, the representative of the New York Department of Financial Services (DFS) reiterated DFS’ view that the guidance is too relaxed and does not provide sufficient disclosure for policyholders.
For any policy covered by the guidance under its terms, the total annualized rate of indexed credits for the illustrated scale of each indexed account may not exceed the lesser of (x) or (y), where:
- if the insurer issues a “Benchmark Index Account” (as defined in the guidance, and generally an S&P 500-indexed account with certain specified features such as an annual cap on interest calculations), the average rate of the index for daily rolling 25-year periods beginning 66 years prior, through the 25-year period that ends on the most recent December 31, or
- if the insurer does not offer a Benchmark Index Account with the illustrated policy, an actuarially determined cap for a hypothetical account that meets the definition of the Benchmark Index Account, and
(y) is 145% of annual net investment earnings rate (as defined).
The guidance also prescribes a cap for the annualized rate of credits, as a percentage of account value (prior to the deduction of any charges used to fund a Supplemental Hedge Budget), for any indexed account that is not the Benchmark Index Account. The Supplemental Hedge Budget for an indexed account is, generally, the amount of annualized value that exceeds the lesser of the annual net investment earning rate and the “hedge budget” amount used to determine the cap on interest accrual in the Benchmark Index Account. The annualized rate of credits for such indexed account may not exceed the lesser of
- the annualized rate determined in the prior paragraph (i.e., the lesser of (x) and (y) above) plus the Supplemental Hedge Budget for the indexed account, or
- a rate “reflecting the fundamental characteristics of [such indexed account] and the appropriate relationship to the expected risk and return of the Benchmark Index Account.”
In addition, the guideline imposes a limit on the earned interest rate for the “disciplined current scale” of the policy (as such term is used in the NAIC’s Life Insurance Illustration Model Regulation, generally the scale of non-guaranteed elements constituting an illustrated limit that is based on historical experience).
- If an insurer engages in a hedging program for indexed credits in an account, the assumed earned interest rate may not exceed the lesser of
- the annual net earnings rate, plus 45% of the lesser of
- the hedge budget minus any annual floor, to the extent that the floor is supported by the hedge budget or
- the lesser of the annual net earnings rate and the hedge budget that is used in the determination of the Benchmark Index Account.
- the annualized rate of indexed credits, plus the annual net earnings rate, minus the hedge budget.
- If an insurer does not engage in a hedging program, the assumed earned interest rate underlying the disciplined current scale may not exceed the annual net investment earnings rate.
If the illustration includes a policy loan, the illustrated credited rate for the loan (as defined more specifically in the guidance) may not exceed the current applicable rate by more than 50 basis points. For example, if the illustrated rate is 4.00%, the illustrated credited rate may not exceed 4.50%.
The guidance also requires that certain supporting information be provided in the illustration, such as a table showing the minimum and maximum of the average credit rates for the rolling 25-year periods described above.