As the old adage goes, “In theory, there is no difference between theory and practice. In practice, there is.” I think this proverb applies to many aspects of our industry, but perhaps nowhere is it more obvious than with regulation and the recent A-supplement to Actuarial Guideline 49 (AG49). Life insurance companies only had a few short months to grapple with the theory behind the guideline, and as the deadline loomed, it was time to start doing a lot more practice. The responses varied widely with some carriers making more substantive mechanical changes to their products while others were basically unchanged except for illustrative restrictions imposed by AG49-A. For our LifeTrends partners, we will be doing a technical and deeper piece describing all these changes and more, so stay tuned for that in the near future. For today, we want to turn our attention on the actual effects on the IUL market – in a very broad sense, how much impact did illustrations experience now that the clouds have cleared?
In order to answer our question above, we took a very common example scenario and tracked how it changed before and after AG49-A (Early August 2020-Mid January 2021). As illustrated values are a major focal point in this regulation, they tend to take some hits but in different ways depending on market and structure. In a general sense, the accumulation market was more affected than the protection market, higher illustrated rates more affected than lower ones, and products with more aggressive bonuses bore more of the brunt than simplified offerings.
In accumulation IUL, illustrated incomes see their lowest decrease levels at lower interest assumptions. When assuming a 5% illustrated rate, the market moves down by 6% on average between August of last year to now. This jumps up significantly higher at the maximum illustrated rate as the average income decreases by around 20%. Also, reductions when considering participating loans are a bit stronger than those for fixed.¹ This is a heavy, heavy level for the market to fall in our example scenario, and of course some products were hit much harder. On many of the multiplier offerings, decreases in illustrated income could be seen frequently as high as 40% (or higher). However, this story at the max IR assumption is a bit more complicated. On one hand, caps saw fairly heavy dips during this time period on index accounts considered in our benchmarks, which is probably only minimally influenced by AG49-A, if at all.² Since only August, the average cap in the market has lost over 80 basis points, coming to rest around the 10.25% mark. On the other hand, max IR rates at the new cap levels frequently now drop below what is justified by the original 25-year lookback methodology spelled out in AG49, and this is hard to know whether it is directly related to “A” or just carrier discretion. Regardless, more than just regulation adoption needs to be factored in when describing changes at their most optimistic illustrated rate.
For protection IUL, illustrated premiums are also hampered by AG49-A, but not to the same level as in accumulation. At a 5% illustrated rate, the average increase to premiums is about 5%. At the max IR, pricing shows higher by about 10% on average with cap rates seeing decreases at a much lower magnitude than that found in accumulation (below 3%). Again, the maximum illustrated rates can frequently be lower than what the caps might justify.
What happens now? Well, if the past is any indication, the conversation surrounding indexed products and especially their illustrations is nowhere near over. Even from the outset, there have been very different responses to this regulation, and that trend is likely to only continue as companies find ways to further innovate in this new epoch of IUL. We saw it with AG49, which lead ultimately to interest bonuses, culminating in the multiplier model, and we will likely see it again with “A” as carriers come to grips with it and seek to differentiate themselves from the competition. In addition, the industry is now coming to grips with the newly released changes to section 7702 of the tax code dealing with life insurance. This is likely to be another catalyst that leads to change in the indexed universal life marketplace. We will be closely monitoring the situation in order keep you up to speed with all the trends in the industry. To stay up to date with all changes going on, become a LifeTrends partner, today. Partners have access to a whole host of powerful features and will have access to much more extensive research pieces like the follow-up to this one on AG49-A.
¹ The decrease to the new 0.5% arbitrage level on participating loans with AG49-A helps explain why they see even stronger drops. Average decreases are just over 20% for participating loans and about 17.5% for fixed loans.
² The decrease on caps is very likely a continuation of the stagnantly low interest rates in the market. Please see our May POINTS “Interest Rate Interplay” for more information on the impact due to this factor.