Ruark Releases 2020 Fixed Indexed Annuity Studies

Increasing data exposure in key areas

Ruark Consulting, LLC today released the results of its 2020 industry studies of fixed indexed annuity (FIA) policyholder behavior, which include surrenders, income utilization and partial withdrawals. Ruark’s FIA studies cover products both with and without a guaranteed lifetime income benefit (GLIB).

“With new data contributors, and rapid growth in the FIA market, data exposures in key areas continue to increase,” said Timothy Paris, Ruark’s CEO. “More data enables us to do more detailed analysis, identify new patterns, and – critically – help our clients achieve meaningful risk reduction in their models.”

Among the notable increases in exposure:

  • Total exposure years grew to 23 million, a 21% increase over the 2019 study
  • Double the exposure years for GLIB contracts past the end of the surrender charge period
  • A 39% increase in lifetime income withdrawals, to $5.4 billion

The study data comprised over 4 million policyholders from 17 participating companies spanning the 12-year period from 2007-2019, with $296 billion in account value as of the end of the period. GLIB exposure constituted 44% of exposure overall, and 49% of exposure in the last 12 study months.

Highlights include:

  • Lifetime income commencement rates are low, 6% overall in the first year following the end of the waiting period and then falling to the 2-3% range in years 3 and later. There is evidence of a spike in utilization after year 10, particularly where the benefit is structured as an optional rider rather an embedded product feature. Age, tax status, and contract size all influence commencement rates.

  • Lifetime income utilization increases sharply when policies are in the money, that is, the benefit base exceeds the account value. After normalizing for age, tax status, and contract duration, contracts that are 25% in the money or more exercise at a 10% rate. In contrast, when contracts with lifetime withdrawal benefits are out of the money, at the money, or modestly in the money, policyholders exercise at a base rate of about 2%.

  • FIA contracts typically offer the opportunity to take 5-10% of account value annually in penalty-free withdrawals, often following a 1-year waiting period. This is the case for contracts with and without a GLIB, though free partial withdrawal frequencies and amounts are somewhat lower on contracts with a lifetime income guarantee.
  • Free partial withdrawal activity is influenced by age and required minimum distributions, as well as contract size and the presence of a waiting period. Notably, withdrawal sizes spike in the year following the end of the surrender charge period, when all partial withdrawals become penalty-free; average withdrawal sizes for contracts without GLIB double to 20% of account value in the year immediately following the end of the surrender charge period.

  • Surrender rates continued to climb in 2019, particularly among contracts past the surrender charge period. The increase is broadly consistent with the rise in FIA sales that has been reported across the industry. While net sales have grown, a certain proportion of the increase in gross sales is likely attributable to exchanges of one FIA product for another.
  • Contracts with a guaranteed lifetime income benefit have much better persistency than those without, and among contracts that have begun taking income withdrawals, surrender rates are even lower. Persistency appears insensitive to nominal moneyness (the relationship of account value to the benefit base), but when an actuarial moneyness basis which discounts guaranteed income for interest and mortality rates is applied, we see that persistency is greater when the economic value is higher, as should be expected.
  • The relationship between surrender charges and surrender rates can be quantified. The study examines the relationship of persistency to the effective surrender charge, that is, the difference between account value and cash surrender value.

  • Surrenders are sensitive to external market forces as well as the absolute level of credited interest rates. Contracts earning less than 2% exhibit sharply higher surrenders than those earning more. As competitive market interest rates increase, so do surrenders, though there is some indication that a higher credited rate tempers the increase. In contrast, equity returns are negatively correlated with surrenders. Where cash surrender values are subject to market value adjustment, surrender rates for policies with a positive market value adjustment exceed those for policies with a negative adjustment. In the aggregate, policyholders act as though a positive MVA is a bonus, rather than a mechanism to make both parties whole, while surrender rates for contracts with negative MVA are similar to those for contracts with no MVA feature.

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