It's always great catching up with industry technical guru and thought leader, Bobby Samuelson.  Bobby's Life Product Review is the only source for independent, objective and technical life insurance product intelligence and an outstanding resource for all of us in this industry. We asked Bobby if he would like to join Windsor's Marc Schwartz in a conversation about the latest developments in Index Universal Life products, and Bobby graciously accepted.

Marc:  Having seen an illustration or two during my career, I know this is the primary way producers set expectations with clients.  And of course, AG49 is the regulatory effort to bring some discipline to setting reasonable or appropriate expectations as it relates to IUL.  Is AG49 doing what it is intended to do?

Bobby:  Yes and no.  One of the primary goals was to fix the basic problem of products with identical caps and floors illustrating at different crediting rates because carriers were calculating their hypothetical historical lookbacks differently.  AG49 did fix that problem.  But, beyond that, the intent of AG49 to both standardize industry practices and limit illustration warfare has been systematically undermined by new product features.  On those counts, things are worse than before AG49.

Marc:  In terms of IUL design, carriers seem to moving to either "simple" or "complex" with both sides being ardent believers that their design will ultimately create superior consumer value.  First of all, are you seeing this same dichotomy?  And secondly, what side are you on?

Bobby:  Yes, definitely.  Carriers are picking sides, but I'm not so convinced that the issue actually revolves around "consumer value."  That's a really hard term to define and there are no objective measures of it. In my mind, the issue is how we – life insurers, distributors and agents – see our value proposition to our customers.  Are we selling protection or performance?  If it's protection, and in this case, the downside protection and upside potential in Indexed UL, then a simpler, low-cost design is a good fit.  If you think you're selling performance, then you want whatever illustrates best and has the potential for the most upside, even if the downside risk and volatility are greater.

What side am I on?  I think every time the life insurance industry has sold its products on the basis of performance, we've ended up with a black eye.  So that's an easy call.

Marc:  And with IUL often being sold as an accumulation vehicle, it can be illustrated to look like an attractive and efficient way to fund supplemental retirement income.  What are some of the contributing factors that would impact actual distributions versus what was originally illustrated?  Which of these factors are "governed" by AG49?

Bobby:  Given that there is a 0% chance that real life will match the illustration, then the only reason I can figure for why people are benchmarking IUL products based on projected distributions is because they're making the assumption that the real-world will play out identically for each product, so the product with the higher distributions is the better product.  That's a really, really bad assumption.  There are so many factors at work, even without considering all of the new product designs that increase risk and return in ways that aren't reflected on the base illustration.  On top of that, carriers interpret the illustrated loan spread requirement in AG49 differently, so even the base illustrations aren't comparable.  Honestly, I'm kind of amazed that anyone is even benchmarking on income.  That is the most easily manipulated metric of all.  Benchmark cash values and maybe the standard loan option.  Looking at distributions with indexed loans is about as useful as having a map of London when you're driving in New York.

Marc:  Earlier in our conversation, we talked about how illustrations set client expectations.  Even with regulatory "controls" like AG49, there are moving parts that producers need to understand.  And as it relates to the sophistication and risk tolerance of the client, proper expectations need to be established as this ultimately will determine perceived value.  Let's talk about illustration best practices for what we might characterize as "simple" and "complex" flavors of IUL products.  What do we need to consider for "simple" products and the emerging array of "complex" products?

Bobby:  I actually think the rules of thumb are pretty similar, but the benchmarking is very different.  AG49 requires insurers to illustrate an alternate rate that is usually pretty close to the option budget alongside the base illustration.  I recommend showing both ledgers to the client with equal weight.  If you start saying that the product is more likely to look like one than the other, then you're giving investment advice about a security.  Probably not a great idea.  If you follow that rule of thumb, most of the leverage components for complex products will kind of become obvious and you'll be able to clearly see the concept of taking more risk to get a shot at more upside.

When it comes to benchmarking, simple products can be benchmarked against each other, complex products cannot.  Simple products share similar mechanics.  They are all Indexed UL products in the classic sense.  With complex products, each has its own little cocktail of interest bonuses, multipliers, proprietary indices, asset-charges, persistency credits, dynamic COI rates, you name it.  They do not share similar mechanics and really shouldn't be illustrated against one another.  If you want to sell one of those, you need to understand – really, truly understand – how it works.  Otherwise, you're going to be easily misled.  And, unfortunately, most products on the market are complex and producers everywhere are using old-school benchmarking techniques to compare highly sophisticated products.  It's a bad combination.