‘Dire situation’ in life/annuity sales materials warrants ‘Halloween’ warning: insurance consumer rep

A longtime consumer advocate in the oversight of the insurance industry told regulators that  investment disclosures for life insurance and annuity disclosures and performance are failing consumers and  even charged that has some hard-wired policy directives that can lead to deceptive and misleading advertising. 

In an Oct. 31 letter expressing an unusual urgency, Birny Birnbaum, who heads the Center for Ecomonic Justice, pushed for an overhaul of regulatory work to create a consistent and overarching framework for life insurance and annuity disclosures. He wrote he views the current workstreams as contradictory and fractured, leading to harm for purchasers of the products. 

The non-profit CEJ “also recommends – and cannot stress enough the urgency of – a working group to address the sorry state of life insurance and annuity illustrations and the related harm to consumers,” Birnbaum wrote. 

He noted that the his  purpose “is to better describe the work of the current Life Illustrations working group and, described the current state of life insurance and annuity illustration disclosures for consumers a “dire situation.”

Birnbaum is referring to working groups of the National Association of Insurance Commissioners.

He reminded regulators that one of “the three legs of the NAIC Retirement Security Initiative is consumer education.” However, he alleged that the current NAIC model regulations involving industry product investment  illustrations and advertising  allow and even” in some cases, require – misleading, confusing and/or deceptive information be provided to consumers in the form of illustrations.”

The letter comes as the NAIC is getting ready to decide on the 2020 policy charges for its life insurance and annuity committees.

The charges are now in draft form but they will be considered as early as Nov. 4 in a conference call meeting, according to the meeting agenda.

The Texas-based consumer advocate is recommending an overhaul of the various working groups working on model regulations and guidance for life insurance and annuity product advertising, disclosures the use of indexes for products tied to stock market or other indexes. He is calling for comparative shopping guide so that consumers can see side-by-side the format, operations and design of these products. After that, the idea is that consumers could adjust their expectations and costs more accurately, he suggested.

 Birnbaum noted that the overall  NAIC parent committee, the so-called Life Insurance  and Annuity Committee, often called A Committee, has four work streams involving life and annuity disclosures and illustrations as well as an annuity suitability group and model law that are working narrowly or at cross purposes with each other, using lawed models and neglecting to take on the entirety of what he says needs to be foe on behalf of consumers so they can understand what they are buying. 

Birnbaum pointed to life and annuity products that use indexes to show potential performance as part of the problem. 

In some cases, “insurers turn to bespoke indexes created by investment banks by data-mining historical experience to falsely present potential future earnings,” he charged. But for some products, such as fixed indexed annuities, the use of bespoke indices has created huge conflicts of interest, Birnbaum said. That’s because the investment banks behind the specially tailored indexes could also be hedging to the insurers using the index.

In addition, changes made to help consumers such as a 2015 actuarial guideline that was created to show more realistic accumulation values in indexed universal life products, for instance, has resulted in insurers who now “game” the system by creating new features that add downside risk and have higher expenses. These new features are referred to as multipliers and bonuses .

“The insurers have taken a product that purports to eliminate downside risk and added that very downside risk with asset charges,” Birnbaum charged. The actuarial guideline referenced is known as AG 49. The NAIC states that AG 49, was developed to bring uniformity to life insurance product illustrations when the investments rely on an external index or indices. This works by making “a reasonable cap on the illustrated credited rate.”

The disparities between what life insurance advertising models show versus  what annuity illustrations show isn’t helpful to consumers because some of these products  require certain disclosures and others lack such requirements, he wrote, using as an example differing requirements across products for disclosures on a sequence of return risk.

In pushing for a holistic framework for disclosures and illustrations for all life investment insurance products, Birnbaum praised the regulators work in multiple instances but pushed for changes that bypass the industry’s wishes so the policy work will not be “undermined.” 

The life insurance industry responded swiftly but briefly in a Nov. 1 letter to Doug Ommen, Iowa insurance commissioner and chair of the theNAIC Life Insurance & Annuities Committee and Richard Wicka, the Wisconsin’s insurance regulator’s chief legal counsel and chair of Committee’s Life Insurance Illustrations Issues Working Group and other regulatory officials 

 The letter from American Council of Life Insurers Vice President Michael Lovendusky references the “Halloween Proposed Changes to NAIC (Committee Draft 2020 Charges” in asking regulators to table the proposed charges until the NAIC’s fall national meeting. The meeting is scheduled for Dec. 7-10.

Lovendusky pointed out in his letter that ACLI members had received these proposed substantive changes just moments ago. He lobbied for an opportunity for all interested parties to have a chance to respond to Birnbaum’s proposals before the fall meeting, to be held in Austin, Texas.

“Relevant considerations are underway by the Life Insurance Illustrations Issues Working Group,” Lovendusky, also a long-time industry participant, explained to regulators. He noted that comments are due by Nov. 15. When the working group is has all of the feedback requested, only then should it act, he suggested. 

Upshot: expect many more comments and discussion but Birnbaum has been helping shape insurance regulatory policy for decades. 

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