Regulators want indexed product sellers to get real with illustrations

The bid to reform indexed illustrations took another step this week with a presentation at the National Association of Insurance Commissioners’ spring meeting in San Diego.

Regulators and consumer advocates are raising concerns about how indexed illustrations are presented to consumers, focusing on complex illustrations and potentially inflated return projections that could mislead buyers planning for retirement.

The newly named Life Insurance and Annuities Illustrations Working Group met for the first time last month. Chairman Ben Slutsker, director of life actuarial valuation at the Minnesota Department of Commerce, recounted the challenge to reforming illustrations during a Monday session of the Life Insurance and Annuity Committee.

“It’s really important because it doesn’t only help consumers understand what they’re buying but it really sets the expectations for how their financial savings can grow in the future,” Slutsker said. “One of our big goals here is we want to make sure that the expectations are set appropriately for what these products can do for people.”

Russ Gibson, a consumer advocacy officer with the Iowa Insurance Division, outlined how illustrations — essentially projections of future value — are intended to help consumers understand indexed annuities. But they cautioned that the materials often fall short of that goal.

“Often, index annuities are positioned in the marketplace as somewhere in between a fixed [product], a CD, something like that, versus being directly in the market on that risk-return continuum,” Gibson explained. “The challenge with some of these indexed annuities with the illustrations is the returns are often enlarged.”

In some cases, projections show dramatic growth. One example presented showed a $100,000 investment potentially reaching as much as $879,000 over 10 years — far exceeding typical returns from widely recognized benchmarks like the S&P 500.

‘Backcasted’ history

Regulators said such projections are often based on proprietary indices created by insurers or their affiliates, rather than established market indices with long performance histories. These indices may rely on “backcasting,” applying current models to past market conditions to simulate performance, which can mask volatility and inflate results.

Another concern is the length and complexity of the illustrations themselves. Gibson said recent reviews found documents averaging more than 20 pages, filled with charts, fine print and multiple scenarios.

“That length is a potential disadvantage in my experience,” he said. “There’s a lot of fine print embedded within the illustration from a consumer perspective. In addition, there are multiple numerical charts and graphs embedded within that illustration.”

Gibson also pointed to sales practices, including instances where agents briefly display illustrations on a screen without giving consumers time to review details, or present selective scenarios that highlight favorable outcomes.

Beyond projections, some illustrations may not fully account for fees or changes in crediting rates over time, further complicating the picture for buyers.

During the working group’s initial meeting, regulators said they have informally collected illustrations from roughly 25 to 30 of the top annuity market leaders. A preliminary review found that about one-third of companies showed the highest illustrated annual returns of 10% or lower. The remaining two-thirds showed at least one product or index with illustrated returns above 10%.

Of those above 10%, roughly half fell in the 11% to 15% range, while the rest ranged from 16% to as high as 27%, Slutsker said.

He emphasized that indexed annuities are not inherently problematic and can play a valuable role in retirement planning. However, clearer and more standardized disclosures are needed to ensure consumers have realistic expectations.

Regulation possibilities

Current indexed life illustrations often show returns in the 5% to 8% range, regulators have noted, thanks to guardrails such as the existing illustrations model reg adopted in 1995, as well as Actuarial Guideline 49, which limit illustrated rates and methodologies.

On the annuity side, Slutsker referenced Model Regulation 245, which restricts illustrations for indices that have existed for less than 10 years. It has been adopted by only 10 states.

Slutsker noted the pressure insurers are under in a highly competitive annuity sales environment.

“Honestly, they’re put in a tough spot because if they want to make any sales, they almost have to [illustrate at 20% or higher],” he said. “That said, we do some companies that are not willing to illustrate that high.”

Regulators have solicited written comments and plan to continue examining the issue and explore possible solutions in upcoming meetings.

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