Ruark Consulting Releases 2021 Variable Annuity Studies

COVID-related factors dampened 2020 policyholder activity in key sectors

Ruark Consulting, LLC today released the results of its 2021 industry studies of variable annuity (VA) policyholder behavior, which include surrenders, income utilization and partial withdrawals, and annuitizations.

“We saw clear dampening effects of the COVID-19 pandemic on VA policyholder behavior. But while many people like to say ‘everything changed’ in 2020, that’s not exactly true,” said Timothy Paris, Ruark’s CEO. “With the benefit of full-year 2020 data, we were able to isolate what did change – and what didn’t. Similar to what we observed during and following the Global Financial Crisis in 2007-8, this has significant financial implications for annuity companies’ modeling of future behavior, including product pricing and risk management.”

Ruark’s 2021 study spanned the period from 2008 through 2020, incorporating data from the full calendar year 2020. It thereby captured effects of COVID-19 and related market movements as they developed throughout the year. COVID-related findings include:

  • Pandemic-related factors dampened VA policyholder behavior in 2020. Extreme market activity in the first half of the year, disruption to policyholders’ usual communication patterns with advisors and agents by COVID-related social distancing, and the suspension of required minimum distributions under the CARES Act all served to depress surrender and income commencement behavior; however, the effects were not uniform, instead manifesting in specific market sectors as described below.
  • In the first half of 2020, declines in account values made guarantees relatively more valuable, leading to greater persistency.
  • As annuity sales volumes fell in 2020, VA surrender rates fell as well. However, the declines in surrender rates were concentrated among ultimate contract durations, where rates fell 1-2 percentage points independent of rider type or benefit value. Evidence suggests producers focused their attention on contracts at the shock duration (immediately following the expiration of surrender charges), leading to less turnover among the longest-dated contracts. The decline in surrenders is suggestive of a new, unique surrender regime, distinct from the regimes we observe before and after the 2008 financial crisis.

  • Tax-qualified contracts over age 70 ½ commenced GLWB utilization at sharply reduced rates in 2020, even as commencement rates for other age-tax cohorts stayed level or increased.

  • 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.
  • GMIB annuitization rates accelerated their downward trend in 2020, but only among “hybrid” forms designed for regular withdrawals during the accumulation period.

Study data comprised 93 million years of exposure and 14.9 million policyholders from 21 participating companies, with $768 billion in account value as of the end of the study period. The study’s in-the-money exposures on GLWB contracts were 31% higher than in Ruark’s 2019 study (completed before the pandemic began) and 64% higher for deep in-the-money contracts. Among contracts issued since 2011, deep in-the-money exposure increased to 12% of total exposure, up from 6% in 2019. The study contained over 900,000 exposure years prior to withdrawal commencement for contract durations 11 and beyond, nearly tripling 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; less than 15% in the first year and falling to less than 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 20% depending on moneyness.

  • Annual withdrawal frequency rates for GLWB and GMIB have continued to increase and have become more efficient with approximately 68% 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 13% 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 34% higher than average and 45% higher than under career agency distribution.
  • 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. The effects of size vary depending on the benefit form and also the distribution channel, with considerably higher annuitization rates where the distributor-policyholder relationship is weak.

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.

When once in a century happens twice in 13 years

Are you tempted to dismiss 2020 experience data for your current assumption development work?  Be careful!  Let's look back to this century’s FIRST once in a century event, the Global Financial Crisis of 2007-8, and see how things turned out after that.

Ruark 2010 studies
Surrender rates fell by about half during the crisis and have not returned to prior levels.  The prevailing opinion is that policyholders curtailed financial activities in favor of watchfulness.  A combination of low interest rates and product de-risking means that fewer attractive alternatives are available.

Ruark 2011 studies
The reduction in surrender rates during the crisis has evolved into flatter subsequent rates.  The in-the-money effect, as owners have higher persistency when they perceive more value in annuity guarantees, is still strongly evident, with convincing evidence for a different regime now versus prior to the crisis.

Ruark 2012-13 presentations
Dynamic moneyness relationships have not been stable through the recent crisis -- in fact, sensitivities have increased.  For many years, policyholder behavior risks were not a major concern, until they were.  Here are a few biggies from the public disclosures…

2011:  CAD 300m
2012:  USD 300m
2012:  EUR 600m
2012:  USD 1,100m

What is your company doing to understand and manage policyholder behavior risks?  Do you put as much into this as for management of capital markets risks?  Would you say that you are ahead of the pack?  Would you like to be?  What might this look like?

Ruark 2020-21 studies and presentations
ANOTHER once in a century event, for product risks that are highly sensitive to market crises?!  Yikes.  Dismiss 2020-21 data at your peril.

So don't miss out on our 2021 VA policyholder behavior studies which are on schedule for completion by June 30, with data through year-end 2020.  Please contact me if you have not already submitted your order form.  And triennial VA mortality study is on the way in the fall, and 2021 FIA studies are still fresh since February.

Still not enough?
Thanks to Tamiko Toland and the good folks at CANNEX for including me in their interview series here.  Full video, brief clips, and Q&A document.