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Registered indexed variable universal life: Is RIVUL the next big thing in life insurance products?

Insurance Consulting and Technology|Investments
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By Nik Godon | July 20, 2022

Insurers are aiming to grow their life insurance product portfolios to increase profitability and compete more effectively. RIVUL seems like the next logical innovation in the universal life market.

Many insurers are aiming to grow their life insurance product portfolios to increase profitability and compete more effectively under uncertain economic conditions. Given the recent success in sales of registered index linked annuities (RILAs), now may be the time to consider a life version of the RILA. Registered indexed variable universal life (RIVUL) blends the best of existing life insurance products: a greater upside than universal life (UL) and indexed UL (IUL), and a limited downside compared with variable UL (VUL).

We have seen a tremendous shift in deferred annuity sales over the past four years. Fixed deferred annuities (FDAs) continue to struggle as historically low interest rates have resulted in unattractive crediting rates. While variable annuity (VA) sales have surged post-2020, they have also had some recent struggles as carriers have repriced their living benefits and/or exited from the market. Fixed indexed annuities (FIAs) have mostly weathered the storm, but low interest rates also impact caps, and innovative uncapped indices can only do so much. The big shift has been to registered index-linked annuity (RILA) products; sales have quickly grown to around $10 billion a quarter. These products offer a blend of less limited growth potential (compared with FIA) while also sharing in some of the downside risk of equity market movements. RILA’s share of the annuity market has continued to grow rapidly over the last year.

One can see similarities in UL product share changes over time. The popularity of VUL began to wane after the dot-com bubble burst in the early 2000s and decreased further after the 2008 – 2009 financial crisis. Unfortunately for VUL, there weren’t guaranteed living benefits to overcome the concern about market losses, which can drive early lapses. Consequently, IUL began to grow rapidly in product share after the financial crisis and has since surpassed UL in sales. In addition, lower interest rates have resulted in material price increases to UL with secondary guarantee (ULSG) products and continued decreases in crediting rates causing non-secondary guarantee UL (NSGUL) products to lose appeal, further fueling the growth of IUL. Though there has been some recent renewed interest in VUL, and a surge in sales in 2021 and early 2022, VUL sales are still dwarfed by IUL sales.

So far IUL sales have not been hampered much by reduced interest rates, but with possible further changes to Actuarial Guideline 49 (AG49), it could just be a matter of time. Many IUL carriers use a portfolio yield approach to support IUL. Those portfolio yields are often propped up by other previously issued business that is invested at materially higher interest rates. This has allowed IUL carriers to maintain much higher caps than FIAs, which almost universally use a new money yield approach. We have seen IUL caps slowly come down over time, but many carriers have used other charges, and/or volatility managed funds, to help prop up their hedge budget and caps. While we have seen a recent spike in interest rates, if they remain low relative to history, and IUL sales continue to remain strong with additional renewal premiums coming in, those portfolio yields will continue to decline. Companies can only go so far with additional charges and other tricks of the IUL trade. If IUL starts to illustrate less attractively, will its popularity begin to wane?

Why RIVUL now?

Given the above, we think now is a great time to consider RIVUL. Some carriers have introduced indexed options to VUL, but so far we have seen limited development in the RIVUL space. If the product has tremendous appeal for annuities, why shouldn’t it have the same appeal for UL?

The rationale for why a RIVUL product makes sense is consistent with what has been seen with RILA:

  • NSGUL and ULSG products are viewed as unattractive at low interest rates (the same as FDA products) with low guarantees and expensive secondary guarantees.
  • VUL products still have a market risk that many customers do not like (the same as VA products).
  • While IUL products are still appealing, caps will likely continue to fall (the same as FIA products), and cap propping can only go so far. Further adjustments to AG49 could also hurt IUL’s illustration appeal.
  • RIVUL blends the best of three products: a greater upside than NSGUL and IUL, and a limited downside compared with VUL.
  • When put into a VUL product chassis, RIVUL can also potentially be more capital-efficient than NSGUL/ULSG and IUL given risk sharing and low guarantees.
  • With limited carriers in the market, early entrants can gain first mover advantage and hopefully achieve higher sales and profitability.
  • A VUL with IUL index options as well as RIVUL buffer index options would provide flexibility that allows allocation changes within one policy as a policyholder’s risk tolerance changes over time, rather than having to exchange products.

A current main disadvantage of RIVUL is how it might compete versus IUL from an illustration perspective. Given the use of the portfolio yield approach, IUL caps are relatively high versus what one might be able to achieve with RIVUL and a new money investment approach. Though as portfolio yields continue to drop and interest rates potentially rise further, eventually this IUL advantage could disappear.

VUL chassis considerations

Adding to the list of rationales above, if IUL index options are done in a VUL chassis, the product is not subject to AG49. In addition, variable life insurance policies are not subject to the Model Illustration Regulation; however, we think that insurance carriers should consider some of the approaches adopted for AG49 in illustrating a RIVUL product.

Unfortunately, there are disadvantages of using a VUL chassis:

  • Licensing requirements for agents become more burdensome, as does compliance due to Securities and Exchange Commission (SEC)/securities requirements. There also has been a lot of regulation uncertainty for RILA, and the same could hold true for RIVUL; however, all life products are now subject to VM-20, so there should be no controversy around statutory reserving practices.
  • VUL products can also require more advanced administration systems to handle the products, as would RIVUL products.

However, these disadvantages have the potential to produce a wider moat for carriers that choose to go this route and that already have VUL capabilities. Here is a case where seeming disadvantages could be turned into advantages.

The following table provides a list of key considerations in deciding whether a RIVUL product might make sense for your company and its clients in comparison with other accumulation UL products.

How does RIVUL compare to other accumulation UL products?

fullscreenEnlarge this table

Figure 1. Comparison of RIVUL to other accumulation UL products
Consideration Non-secondary guarantee UL (NSGUL) Indexed UL (IUL) Registered indexed VUL (RIVUL) Variable UL (VUL)
Speed to market Fastest: Product design and administration easiest Fast: Design more complex than UL and administration not as easy Slowest, as prospectus and SEC filing required and new product category; administration more complicated Slower, as prospectus and SEC filing required; administration more complex than UL but still fairly easy for most carriers
Accumulation Low Strong but capped Very strong; should not be as strong as VUL if priced for same profitability; insurance company has to pay for buffer cost, but growth capped at higher level than IUL Strongest
Equity downside risk None None If buffer design then policyholder exposed to portion of large drops; potential loss of surrender and death benefits and greater risk of policy lapse without additional premium; not as exposed as VUL Full exposure for policyholder; potential loss of surrender benefits and death benefits and greater risk of policy lapse without additional premium
Low-rate environment Low crediting and accumulation Caps continue to reduce as portfolio rates fall, though other charges and managed volatility funds can help to support higher caps Better positioned than IUL to offer fewer limits on growth potential No impact
Capital strain/reserving VM-20; strain mostly driven by first-year commissions and acquisition costs VM-20; strain mostly driven by first-year commissions and acquisition costs VM-20; strain mostly driven by first-year commissions and acquisition costs; capital lower due to passing risk to policyholder VM-20; strain mostly driven by first-year commissions and acquisition costs; capital lower due to passing risk to policyholder
Asset liability management Simple; commonly no hedging except possibly for interest rates Hedging program needed but typically fairly simple and delta-focused Hedging program becomes more complicated; may be able to offset some risks with other products Simple; no hedging needed
Complexity for policyholders/agents Simple product for buyers/agents and least amount of licensing requirements for agents More complexity relative to UL due to crediting rate mechanism; agent licensing still fairly limited Product more complex than IUL and VUL; Series 6/63 license required for agents due to being a security More complex than UL but still pretty straightforward for most carriers; series 6/63 license required for agents due to being a security
Illustrations Model Illustration Regulation Model Illustration Regulation and AG-49 Not subject to Model Illustration Regulation but must follow SEC requirements Not subject to Model Illustration Regulation but must follow SEC requirements

Conclusion

RIVUL seems like the next logical innovation in the UL market. Given the advantages/benefits it can provide an insurance carrier and its customers, it seems like it will just be a matter of time before more companies start to offer this kind of product and start to take UL market share away from their competitors.

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Director, Insurance Consulting and Technology

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