Ruark Releases 2020 Variable Annuity Study Results

Indications that COVID-related market activity and disruptions affected policyholder behavior

Ruark Consulting, LLC today released the results of its 2020 industry studies of variable annuity (VA) policyholder behavior, which include surrenders, income utilization and partial withdrawals, and annuitizations.

“We expected that 2020 behavior would be different,” said Timothy Paris, Ruark’s CEO. “By looking at industry-level data, we are better able to identify and quantify those differences – especially on current-generation products.”

Ruark’s 2020 study spanned the period from January 2008 through June 2020. The study period was designed to capture early effects of COVID-19 and related market movements. COVID-related findings include:

  • Extreme market activity in the first half of 2020, and disruption to policyholders’ usual communication patterns with advisors and agents by COVID-related social distancing, appear to have affected VA surrender and income commencement behavior
  • Contracts with guaranteed lifetime withdrawal benefits (GLWB) persisted at greater rates than expected, as current-generation products exhibited greater sensitivity to 2020 market movements than they did in the past
  • Surrender rates fell uniformly on older product types in 2020; this is suggestive of a new, unique surrender regime, distinct from the regimes observed before and after the 2008 financial crisis
  • GLWB commencement rates were depressed in 2020 among contracts with the highest propensity to exercise the benefit: in-the-money contracts following the end of the deferral bonus period. Both the level and sensitivity of commencement rates were reduced.

Study data comprised 89 million years of exposure and 13.9 million policyholders from 20 participating companies, with $675 billion in account value as of the end of the study period. The study’s in-the-money exposures on GLWB contracts were 23% higher than in Ruark’s 2019 study (and 40% higher for deep in-the-money contracts). Among contracts issued since 2011, deep in-the-money exposure increased to 9% of total exposure, up from 6% in 2019. The study contained over 740,000 exposure years prior to withdrawal commencement for contract durations 11 and beyond, more than doubling the comparable exposure in Ruark’s 2019 study.

Other study highlights include:

  • GLWB deferral incentives appear to be effective. Income commencement rates are low overall; about 13% 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. After commencement, GLWB continuation rates are over 85%.
  • Income commencement rates increase when GLWBs are more in-the-money, that is, the benefit base exceeds the account value. This effect is quite pronounced after the expiration of common 10-year deferral incentives, with commencement rates ranging from low single digits to nearly 30% depending on moneyness.

  • Annual withdrawal frequency rates for GLWB and GMIB have continued to increase and have become more efficient with approximately 65% of recent experience at the full guaranteed income amount.
  • Free partial withdrawal amounts increase after the end of the surrender charge period, similar to the familiar “shock” in surrender rates. Excess withdrawal amounts on GLWB and GMIB increase as well.
  • 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 80% of GLWB exposure is in-the-money, whereas on an actuarial basis only 12% is in-the-money.

  • Surrender rates vary little across distribution channels, once other drivers of surrender behavior are accounted for. The exception is where companies cannot ascertain whether a policyholder has an ongoing relationship; where the distributor-policyholder relationship is weak, surrenders are as much as 50% higher.

  • 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, benchmarking, and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.