Ruark Releases 2019 Variable Annuity Study Results

Increasing data exposure in key areas

Ruark Consulting, LLC today released the results of its 2019 industry studies of variable annuity (VA) policyholder behavior, which include surrenders, income utilization and partial withdrawals, and annuitizations.

“Data exposures in key areas have increased considerably since last year’s studies, allowing for more detailed analysis and higher credibility of results,” said Timothy Paris, Ruark’s CEO.

Among the notable increases in exposure:

  • Nearly double the exposure in years 11 and later, including income commencement behavior after common 10-year deferral incentives for guaranteed lifetime withdrawal benefits (GLWB).
  • 12% increase in exposure for in-the-money GLWBs, following equity market declines during the fourth quarter of 2018.
  • 29% increase in exposure for guaranteed minimum income benefits (GMIB) past their waiting period.

Total data comprises 85 million years of exposure and 14 million policyholders from 24 participating companies spanning the 11-year period from 2008-2018, with $795 billion in account value as of the end of the study period.

Highlights include:

  • GLWB deferral incentives appear to be effective. Income commencement rates are low overall; about 12% in the first year and falling to about half of that in years 2-10. However, commencement rates more than double in year 11 with the expiration of common 10-year bonuses for deferring income, before falling to an ultimate rate.  The pattern for GMIB is similar, although somewhat muted. After commencement, continuation rates are over 80%.

  • Annual withdrawal frequency rates for GLWB and GMIB have continued to increase and have become more efficient with approximately 60% of recent experience at the full guaranteed income amount.

  • The effects of "moneyness" (account value relative to the guarantee base) on partial withdrawal behavior differ depending on circumstances. Income commencement rates increase when GLWBs are more in-the-money. This effect is quite pronounced after the expiration of common 10-year deferral incentives, with commencement rates ranging from low single digits to nearly 40% depending on moneyness. At all durations, when guarantees move out-of-the-money, withdrawals in excess of the maximum amount are more common, which is suggestive of policyholders taking investment gains out of the contract.
  • On contracts without GLWB or GMIB, free partial withdrawal amounts increase after the end of the surrender charge period, similar to the familiar “shock” in surrender rates.

  • Surrender rates have not returned to 2008 levels, even as strong equity market performance has boosted account values in recent years. Newer sales include more GLWBs which have strong incentives for persistency. Also, VA writers de-risked their product offerings in the wake of the 2008 financial crisis and the low interest rate environment has reduced the attractiveness of non-VA investment alternatives.

  • Three surrender regimes are evident during the study period: surrenders at the shock duration were nearly 30% at the onset of the 2008 economic crisis, and in a range of 12-16% subsequently except for 2016 when they reached their nadir below 10%. The 2016 dip is believed to be the result of uncertainty surrounding the DOL’s proposed Fiduciary Rule and other political factors.
  • Contracts with GLWB and GMIB have much lower surrender rates, and this effect is even more pronounced for those limiting their partial withdrawals to the guaranteed income amount.

  • Policyholders that take systematic withdrawals on GLWB and GMIB exhibit a select-and-ultimate effect, with very low surrenders in the first systematic withdrawal year and increasing thereafter. In the fourth systematic withdrawal year and beyond, surrender rates are comparable to those of contracts that have not taken any withdrawals.
  • When calculating relative value for GLWBs, use of a nominal moneyness basis (account value relative to the GLWB benefit base) can be deceiving, since it fails to reflect important aspects of the product’s economics. Therefore, it may be preferable in many cases to use an actuarial basis that incorporates interest and mortality rates. Surrenders exhibit a dynamic relationship to moneyness, whether measured on a nominal or actuarial basis. On a nominal basis 81% of GLWB exposure is in-the-money, whereas on an actuarial basis only 11% is in-the-money.

  • Annuitization rates for GMIBs are in the low single digits and continue to decline. “Hybrid” versions that allow partial dollar-for-dollar withdrawals have much lower rates than traditional versions which reduce the guarantee in a pro-rata fashion, especially in the first year of eligibility. Factors influencing annuitization rates include age, duration, last year of eligibility, death benefit type, contract size, and moneyness.

Detailed study results, including company-level analytics and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.