Key Observations – Surrender & Partial Withdrawal Behavior

  • Surrender Charge – early results show a clear dynamic. The presence of the Contingent Deferred Sales Charge (CDSC) keeps industry surrender rates in single digits. However, in the year following the expiry of the CDSC, average rates jump by a factor of 5. Since FIA CDSC periods tend to be long and thus industry experience relatively new, the story regarding the shock duration and ultimate rates is still developing.
  • Overall surrender rates declining slowly but steadily. Over the 8 years studied here, surrenders have declined. This is most apparent at the shock duration even with the limited credibility for earlier years mentioned above. But even in the years prior to the CDSC expiration, there has been a decline from high single digits by more than half in recent years.
  • Why the decline in surrender rates? The increasing prevalence of a living benefit rider has had the effect of making policies stickier. Additionally, the stock market recovery, leading to more favorable interest credited rates, has contributed to this pattern of declining surrender rates.
  • Especially the living benefit rider – The effects of the presence of living benefits are clear as surrender rates for policies with a living benefits rider are half the level of those without one.
  • Withdrawal utilization, living benefit rider vs. not – Contracts without a living benefit rider frequently take withdrawals – almost 1/3 of them do in an average year. They also take withdrawals of higher amounts than those with an LB rider. Policies that do have a rider tend to be active (prior to turning on lifetime income) as well, but at lower rates, in the realm of 1/4 of contracts.
  • Primary factors influencing FIA withdrawal behavior are attained age and tax status (regardless of LB presence), particularly on qualified contracts with owners over age 70. Duration since issue also has some effect but is of lesser consequence.

On the horizon – Items to keep an eye on for future FIA studies:

  • Credited interest rates – contracts with the lowest interest credited rates (<2%) had materially higher surrender rates, but that effect was limited to that bucket. Will the market recovery and accompanying higher credited rates consistently lead to more satisfied customers and so better persistency?
  • Living benefit value – the dynamic effect, where more valuable guarantees correlate with lower surrenders, is well-established in more mature markets such as variable annuities. This effect has been hard to discern so far with FIA living benefits due to the newness of the guarantees.  What will that dynamic curve look like as it develops?
  • Living benefit utilization – the incidence of FIA living benefit owners turning on lifetime income has been very low. Will that continue or will there be an uptick?  If the latter, what will be the triggers?

Participating companies:

  • AIG Life & Retirement
  • American Equity
  • Athene
  • EquiTrust
  • Forethought
  • Genworth
  • Midland National
  • Nationwide
  • Pacific Life
  • Phoenix
  • Protective
  • Security Benefit

Industry overview and methodology

Ruark’s FIA and VA industry studies include mortality, surrender, and partial withdrawal policyholder behaviors that are vitally important to the long-term financial performance of these products. Through the experience study results report and discussions with us, participating companies gain a detailed understanding of complex industry results and comparison to their own-company results for benchmarking purposes.

The number of FIA participating companies and volume of data studied has grown steadily since we started studying these behaviors in 2010. The 12 participating companies, contributed 10 million contract years of data for these latest studies, covering the period January, 2007 through September, 2015.

About us

Since 2007, Ruark has completed dozens of annuity experience studies that facilitated vital understanding of industry policyholder behavior.  We are recognized leaders in annuity risk management, policyholder behavior analytics, and reinsurance brokerage and administration.

Contact:  Joel Lagan | 860 930 5069 | joel@ruark.co | www.ruark.co