Daphne Bartlett

1991, ADDRESS OF THE PRESIDENT, DAPHNE D. BARTLETT, 6p

1995, SALES ILLUSTRATIONS, Society of Actuaries – 14p

MS. DAPHNE D. BARTLETT: I’m a member of the NAIC working group that developed this regulation and I am terribly disappointed. I have been interested in the illustration issue for probably 15 or 20 years, and some of you may know that when I became
President of the SOA, the first thing I did was establish the task force that developed the
report on sales illustrations. Tragically, what’s come out of this process doesn’t do the
job. Two weeks ago in the National Underwriter, there was a report of the working
group’s meeting in Philadelphia, and on the same page was a writeup about an agent who
had won a very large amount of money from his company. Apparently, he never understood about “vanish” illustrations and got into trouble with his clients. All of this, of
course, happened during the 1980s when illustrations were presented using the high
interest rates at the time. They all fell apart because interest rates went down. Now
interest rates didn’t go down because actuaries were being aggressive. Interest rates went
down because they went down; actuaries had nothing to do with it. Policyholders were
disappointed, because you’d much rather believe that you will receive the $5 million
shown in the bottom right-hand comer of the illustration than perhaps a more realistic number. Illustrations, prior to this new regulation, have disclaimers on them that say the numbers
are not guaranteed. Now, think about what would happen if this regulation had been in
effect ten years ago. The same article would be appearing in The National Underwriter.
Maybe it wouldn’t have used the word “vanish,” but it might have used “disappearing” or
any other word you can think of that means the same thing. I think that the NAIC group
has labored very hard and come forth with nothing much, but I think we had an opportunity. At this time, interest rates are at somewhat of a manageable level, they aren’t at the
12-14% level that existed in the mid-1980s. We’ll all be gone when interest rates get up
to that level again. When they start to go down again, it will be proven that this regulation
doesn’t work. I think it’s probably too late for anything to be done, but I wonder why there is such a
rush. We can do a better job. We can prepare a regulation that addresses life insurance
annuities and variable products all in one, and I think there are many possibilities to
redefine what an illustration is and what it should contain. Illustrations do not have to be
current scale or disciplined current scale forever. Can you think of anything else that is
represented as continuing the status quo forever? I think that there are ways that we could
develop a regulation that would keep all companies on a level playing field so that nobody
would be unfairly advantaged or disadvantaged, and would benefit the consumer and
achieve the real objective of this regulation which is to not mislead. Ms. Bartlett said that since she had first reviewed the regulation draft three weeks earlier she had some ideas about what
should be included in the model in the area of a sensitivity index. She said the interest component of an illustration was
different from the other components (mortality, expense, persistency) because the other elements were largely controlled
by the company, but the interest component was dependent upon the economy at large. She said it was important to
recognize that companies could not have large difference from each other in interest rates. She suggested grading in the
interest rate over a period of time to standardized assumptions. She said that this would be an appropriate substitute for
the sensitivity index. She saw several advantages. It eliminated the portfolio versus new money problem because one
could grade down, and the other might need to grade up. She said the numbers generated by the illustration would be
more realistic, and it might actually create a situation where the company’s results would be above illustrated values. She
also said this would minimize the need for in-force illustrations.
1995-1, NAIC Proceedings