Ruark Releases 2021 Fixed Indexed Annuity Study Results

Provides first look at the effects of COVID-19 on policyholder behavior

Ruark Consulting, LLC today released the results of its 2021 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).

“This study gave us our first look at the effects of COVID-19 on FIA policyholder behavior,” said Timothy Paris, Ruark’s CEO. “Given record low interest rates, and disruptions to sales channels, there was no way to know whether past patterns would continue. We’re intrigued by how some relationships changed -- and others didn’t.”

The study data comprised nearly 4 million policyholders from 16 participating companies spanning the 13-year period from 2007-2020, with $264 billion in account value as of the end of the period. GLIB exposure constituted 43% of exposure overall, and 47% of exposure in the last 12 study months. GLIB exposure beyond the end of the surrender charge period increased 83% over 2020 study exposure.

Highlights include:

  • Extreme market activity, and COVID-related disruption to policyholders’ usual communication patterns with advisors and agents, had mixed effects on 2020 surrender activity. Record low interest rates led to more positive market value adjustment, and contracts in the surrender charge period with a positive MVA surrendered at higher rates. For contracts beyond the shock duration, surrender rates declined, consistent with an industry-wide decline in gross annuity sales in 2020; a proportion of gross sales is attributable to exchanges of one annuity 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 (including bonus recapture).
  • 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. Equity returns are negatively correlated with surrenders, but only for contracts without an income benefit.

  • 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. Among contracts with a positive MVA, surrender rates are inversely related to equity market performance; we surmise that policyholders who are disappointed in credited returns on their FIA take advantage of the temporary offset provided by a positive MVA, and surrender at higher rates.
  • Lifetime income commencement rates are low, 7% overall in the first year following the end of the waiting period and then falling to approximately 3%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.
  • We see little observable effect on GLIB utilization from COVID-19 disruptions to sales channels and capital markets, given initial 2020 indications.
  • 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 12% 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%. Income commencement rates are most sensitive to moneyness following the end of the rollup period.

  • 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.

  • 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 jump by 10% of account value in the year immediately following the end of the surrender charge period.

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.