May 25, 2020

May 22, 2020

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Changes to the Index Product Illustration Requirements Are No Child’s Play

The NAIC’s Annuity Disclosure Working Group and IUL Illustration Subgroup continue to chalk out changes to the Annuity Disclosure Model Regulation (Model) and Actuarial Guideline 49 (AG 49) to address index product innovation.

Annuity Disclosure Working Group

The Annuity Disclosure Working Group held class on May 13 and June 5 to discuss the March 7 draft revisions to the Annuity Disclosure Model Regulation, which proposes to modify the requirements applicable to illustrations of index accounts. During those calls, the Working Group discussed the requirements that:

  • The index be in existence at least 20 years.

    Birny Birnbaum argued that an index must be around at least 20 years to be able to illustrate the 10-year low and high scenarios to show consumers how index volatility impacts the interest credited. He asserted that less than 20 years would not show meaningful differences in the low and high scenarios. He and several regulators were also concerned that composite indices could be “drawn up” to illustrate favorably by data mining recent historical experience. Regulators also believed that some seasoning of the index helps ensure that the index is not arbitrarily being put together.

  • The index may only be comprised of other indices.

    Various commenters raised their hands pointing out that erasing the term “components” from the Model would exclude indices that are based on ETFs, futures contracts, and other financial instruments that are commonly used in indices. Regulators were hesitant to use components out of concern that things “may get out of hand” unless components are defined.

  • The index algorithm or method be fixed.

    Hands were also raised to object to the language requiring that the index algorithm or method be fixed. Commenters noted that this requirement is too restrictive, and that there are market reasons for changes in the algorithm or method, including where the construction of the underlying index changed.

  • The index algorithm or method be available for inspection by regulators and consumers.

    Commenters also questioned whether requiring the algorithm or method to be available for inspection by consumers would cause more consumers to be confused. All agreed that consumers need to understand how the index operates and how its value can change. The Working Group noted that the level specificity of what needs to be disclosed is not yet settled.

After the June 5 call, the issues remain unsettled. The Working Group will schedule one more class to continue the lesson.

IUL Illustration Subgroup

The IUL Illustration Subgroup held class on May 28 to discuss a menu of options for enhancing IUL illustrations, reflecting comments from all the papers submitted to the Subgroup. While the menu contained 23 different subjects, the meeting focused on the options that are considered “beyond disclosure,” because they require changes to AG 49 and possibly beyond. During the discussion, Mr. Birnbaum asserted that a complete overhaul of the illustration requirements is needed, as he does not believe merely adding more charts or disclosures to AG 49 would be sufficient. The chair assigned homework and asked for comments on the following options:

  • Clarify whether charges can impact assumed earned interest underlying the AG 49’s ‘disciplined current scale.’

  • Limit the use of variable/index loans.

  • Have consistent treatment of various IUL product types.

  • Apply AG 49 constraints to cash value internal rate of return. 

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About this Author

Ann Young Black insurance and securities lawyer Carlton Fields

Ann Young Black counsels financial services clients on a broad range of insurance, securities, and business issues. She regularly advises clients developing new and innovative life and annuity products and on the insurance and securities issues impacting those products. Ann also advises clients on the laws and regulations regarding the sale, distribution, issuance, administration and operation of, and benefit payment practices related to, these products. Clients also seek Ann's guidance on InsurTech initiatives, including the use of big data, artificial intelligence and machine learning...

Jamie Bigayer Insurance lawyer Carlton FIelds

Jamie Bigayer counsels insurance and financial services companies on transactional, regulatory, and compliance matters arising under state insurance laws, federal and state securities laws, and related agency rules and regulations. Her practice focuses on the development and distribution of sophisticated financial products, including privately placed innovative fixed and variable life insurance and annuity products.

Jamie advises clients on a wide variety of issues including contractual issues, legal structure, disclosure requirements, sales and marketing practices, risk analysis, suitability, internal compliance policies and procedures, market conduct, licensing, and other compliance and regulatory issues affecting issuers and distributors of financial products.

Additionally, Jamie advises clients on the use of big data, artificial intelligence, and algorithmic models for accelerated underwriting, state data security and privacy laws, and the uniform electronic transactions act (UETA) and e-Signature requirements for implementing electronic transactions and document delivery.