NAIC Readies Launch of New Illustration Requirements

On March 31, Ben Slutsker, chair of the National Association of Insurance Commissioners’ Life Insurance and Annuities Illustration Working Group, made clear that “it is a go” to “address annuity illustrations, and illustrations more broadly.” This followed the working group’s receipt of comments and ensuing discussion on the chair’s exposed question — “What are both short-term and long-term approaches to ensure consumers receive reasonable expectations for index annuity returns at the point-of-sale?”— which orbited around several key themes:

• Reason for Illustrations. Illustrations are not meant to be predictors of performance but rather explain how an insurance product operates, including a fixed index annuity, under different market conditions.
• Proprietary Indexes. The double-digit illustrated rates observed by regulators are propelled by proprietary indexes for which backcasted data is used. Many commenters theorized that prohibiting illustrations based on the proprietary indexes — or at least those having no meaningful actual history (i.e., 10 years, as required by Model 245) — would bring back to earth the illustrated rates that led to regulators’ concerns that unreasonable consumer expectations are being created.
• Crediting Factors. The at-issue caps, participation rates, and other crediting factors used in the illustration also thrust the illustrated rates higher. Some commenters questioned whether the illustrations should show the impact of changes to these crediting factors. Others suggested that insurers should disclose the history of these crediting factors, with one proposing that the history should be for all index life and annuity products, which fails to recognize that different asset portfolios could support different products and result in different crediting factors.
• Model 245. As noted in the working group’s “Decision Points for Next Steps” document, Slutsker and several commenters discussed whether Model 245’s illustration and disclosure requirements would be a useful starting point for addressing regulatory concerns with annuity illustrations. Some commenters asked whether regulators had compared illustrations used in those states that have adopted Model 245’s illustration requirements against illustrations used in the other states. Slutsker acknowledged that this was on the regulators’ task list.

Several commenters, including actuary Tomasz Serbinowski of Utah, argued against using Model 245 as a starting point.

• Several commenters propounded that the recent financial markets are an aberration and that the persistent growth of these markets will not continue. Thus, it was argued, developing illustrated rates based on recent history may also result in unrealistic consumer expectations.
• Some also believed that annuity illustrations should not be based on the different index crediting options. Serbinowski suggested that the illustrated rates should be hypothetical with round numbers to signal to consumers that the illustrated rates are not projections of what could happen. Another commenter suggested using the U.S. Treasury rate, plus a prescribed percentage.

Slutsker announced that a new 45-day exposure would be issued asking: “What should be the starting point of a short-term solution: Model 245 language or something else (such as AG 49-A, other guidance, or starting anew)?”

For proposed starting points using existing guidance, commenters are asked to provide the types of modifications that would be necessary to address the regulatory concerns regarding illustrated rates and transparency. For starting anew, the working group seeks comment on how the approach’s scope can be limited to a short-term solution before turning to a longer-term solution. Slutsker also started the countdown for the new short-term approach for annuity illustrations, stating that blastoff would be within the year.