A regulation governing indexed universal life insurance policies has had a fairly limited effect, leading some observers to question whether the regulation went far enough and if more stringent rules are necessary.
The rule, Actuarial Guideline 49, sought to rein in overly rosy illustrations of policy returns for indexed universal life, a type of cash-value life insurance, by providing uniform standards for insurers to follow when calculating those projections. Brokers and insurance agents use such illustrations as a primary sales tool for these policies.
However, in the two-plus years since the rule's adoption, insurers are still using what some observers call unrealistic return illustrations that could misrepresent the product to consumers.
In August 2015, when the National Association of Insurance Commissioners adopted the guideline, insurers were using an average rate of return of 7.3% when they illustrated indexed universal life policies; the rate in August this year was 6.35%, a drop of less than 1 percentage point, according to Moore Market Intelligence, a consulting firm.
While NAIC officials contend the regulation's intent was merely to narrow the range of illustrated interest rates, some observers say the reduction isn't nearly as significant as had been expected, leaving consumers vulnerable.
"Illustrations are what sell cash-value life insurance," said Sheryl Moore, CEO of Moore Market Intelligence. "It was timely to implement this illustration regulation, but I don't really feel like it was effective in accomplishing what people thought it should accomplish."
'PRODUCT DU JOUR'
Indexed universal life insurance, similar to its indexed-annuity counterpart, is marketed as a product with upside potential and no downside risk, a message that seems to have resonated with consumers following the 2008 financial crisis.
The product has experienced 10 consecutive years of sales growth, hitting $2.3 billion in annualized premiums last year, up from $300 million in 2006, according to Limra, an insurance industry group.
Indexed universal life insurance represented 21% of annualized premium among all life insurance products in 2016, up from 3% a decade earlier, Limra data show.
"This is the product du jour," Scott Witt, an insurance adviser and actuary, said.
"I think policy holders are being set up for disappointment," he added, referring to unrealistic policy illustrations. "I can appreciate these regulations, and their heart is in the right place, but it's debatable whether they've gone far enough."
Some insurance companies push back against such criticism, though. Ross Sneyd, spokesman for National Life Group, said indexed universal life illustrations "are informative tools that are intended to help policyholders understand how products would perform in various scenarios."
National Life was the third-largest seller of indexed universal life insurance through the first three quarters of this year, behind Pacific Life Companies and Transamerica Life Insurance Co., according to market research firm Wink Inc.
Indexed universal life products offer a guaranteed interest-rate floor, often 0%, through the purchase of bonds and other fixed-income instruments, which make up roughly 90-95% of the insurer's portfolio. Insurers invest the remainder in derivative instruments that track a market index such as the S&P 500, which delivers upside. Insurers are able to limit returns, often via a cap of the interest rate, which the insurer is able to change over the life of the policy.
Observers said indexed universal life insurance has enjoyed a competitive advantage of sorts over other types of life insurance when it comes to policy illustrations. The NAIC had previously issued regulations aimed at reining in illustrations of cash-value life insurance products such as variable universal life and whole life. However, those largely didn't cover indexed universal life insurance because IUL products were developed after issuance of the regulations, Ms. Moore said.
Many broker-dealers, for example, currently have representatives run policy illustrations for clients at 7% net of fees, said Ms. Moore. She questioned why projections for variable universal life, which have unlimited growth potential, are so similar to those of their indexed counterparts.
Further, Mr. Witt, owner of Witt Actuarial Services, said he sees no "rational justification" for why consumers should expect an indexed universal life policy to outperform whole-life policies over the long term. That's largely because companies offering whole life insurance support the policies with more equity exposure, typically 10-20%, Mr. Witt said.
Yet, many whole life companies illustrate at a rate that is similar to or lower than indexed universal life illustrations, Mr. Witt said.
"[AG 49] has helped," Mr. Witt said. "In the absence of it, the competitive gap would have widened even further. But the net effect is, it only slightly decreased the relative appeal of indexed policies."