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:
(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
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 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.