Ruark Consulting Releases Variable Annuity Mortality Study Results

Mortality rates fall 3%, driven by mortality improvement and business mix

Ruark Consulting, LLC today released the results of its 2018 study of variable annuity (VA) industry mortality. The study was based on experience from 13.3 million policyholders spanning the period January, 2008 through December, 2017. Twenty-four variable annuity writers participated in the study, comprising $880 billion in account value as of December, 2017.

“We have 60% more data than our last VA mortality study, allowing for high credibility even when splitting results by multiple factors of influence,” said Timothy Paris, Ruark’s CEO. “We’ve also added much more detailed analysis of mortality results by living benefit and death benefit types, partial withdrawal and income behavior, contract size, tax status, interactions, and changes through time. These studies provide new and important insights into VA mortality, particularly with the seasoning of living benefit blocks beyond the end of surrender charge and bonus periods.”

The company’s previous VA mortality study was released in 2015.

Paris highlighted study enhancements in response to recent regulatory proposals. “It’s not often that life and annuity actuaries need to address new mortality and projection bases for reserves and capital,” he noted, “but now is indeed the time for that. So we’ve included analyses of industry mortality results relative to the 2012 IAM Basic Table with projection scale G2, our proprietary Ruark VA mortality table, and other tabular bases to make the study results as meaningful and actionable as possible for our client companies and their actuaries.”

Study highlights include:

  • Aggregate variable annuity mortality has declined 3% since 2015. The decline is largely attributable to two factors: mortality improvement and changes in the business mix. Contracts with living benefits exhibit lower mortality than average, and these contracts make up an increasing proportion of overall exposure. Whereas 44% of 2008 account value was on contracts with no living benefit, and 43% on contracts with guaranteed lifetime withdrawal benefit (GLWB) or guaranteed minimum income benefit (GMIB) riders, by 2014 the proportions were 25% and 69%, respectively. The proportion of exposure has remained roughly the same in subsequent years.

  • In this study for the first time, Ruark benchmarked VA mortality against the 2012 Individual Annuity Mortality (IAM) Basic table with projection scale G2. The 2012 IAM Basic with G2 projection is under consideration as the standard for calculating insurers' reserve and capital requirements for variable annuities. Ruark also benchmarked VA mortality against its proprietary 2015 Ruark Variable Annuity Mortality (RVAM) table, which was developed from the results of the prior study. Standard industry mortality tables systematically overstate or understate various age-sex cohorts, even when they closely approximate aggregate mortality. In contrast to the 2012 IAM table, which departs as much as 18% from experience at central ages and over 45% for younger female cohorts, the 2015 Ruark VAM table diverges by less than half those amounts.

  • Variable annuity mortality continues to evolve through time. Changes in the business mix, and mortality improvement since the prior study, have led to changes across age-sex cohorts as well as a decline in the absolute level of VA mortality.
  • A distinct hierarchy in mortality across living benefit types is apparent. Lowest mortality is found on GLWB and GMIB riders. Guaranteed minimum withdrawal benefit (GMWB) and guaranteed minimum accumulation benefit (GMAB) riders fall in a middle group, with average mortality. Those contracts without living benefits exhibit above-average mortality. This hierarchy is consistent with a pattern of policyholder selection on the basis of longevity benefits. A GLWB rider allows the policyholder to make regular withdrawals, up to a specified amount, until death – even after exhausting their account value. This benefit is most valuable to policyholders with an expectation of favorable longevity. Above-average mortality on contracts without living benefits is consistent with the intuition that less-healthy VA buyers would rationally forego a financial transaction that features such benefits -- and instead purchase a product whose main feature is a death benefit. Analysis by contract duration indicates that the selection effects wear off over time, similar to traditional life insurance products.

  • The extent to which mortality differs by living benefit type suggests that utilization of living benefits might reveal selective pressures as well, and Ruark observes that withdrawal benefit mortality differs considerably by withdrawal history. GLWB contracts that have taken no withdrawals have low mortality; those that have taken regular income withdrawals have intermediate mortality; and those that have taken excess withdrawals exhibit above-average mortality. Ruark’s conjecture is that these differences reflect policyholders’ different income and liquidity needs in response to conditions that correlate with higher mortality.

  • The effects of policy size are apparent only when results are segregated by living benefit type. Among more generous living benefit types, mortality declines with increased account value, with a difference of 7 percentage points between the smallest and largest contracts. Among older living benefit forms (GMWB and GMAB), the relationship is flat. And among contracts with no living benefits, mortality increases with account value, by 15 percentage points from the smallest to the largest contract size groups. Ruark believes that more affluent policyholders are generally more financially savvy and have greater access to expert financial advice, which translates to more savvy purchase and benefit retention behavior.

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

For further information on results, to purchase the study, or if you have any other inquiries, click here or email Timothy Paris (

Welcome Michael Riley

We are pleased to welcome Michael Riley to Ruark's analytics team, as Data Engineer.

Michael comes to us from Conning, where he was VP for Information Systems. He has 20 years’ experience managing data warehouses, including past roles at MetLife, Citigroup and Travelers. Michael is a graduate of the University of Connecticut, a CPA, and a Certified Scrum Master.

Michael will be responsible for Ruark's data architecture and data management, including both production processes and ongoing development.

Good data is the foundation of strong data analytics. With Michael on the team, we look forward to continuing to serve the annuity industry with our experience studies, predictive analytics, assumption model recommendations, and consulting services.

To reach Michael directly, click here.

EBIG notes: Structured VAs

At the Society of Actuaries's recent conference on Equity-Based Insurance Guarantees, one of the more interesting sessions (for me) related to structured variable annuities. These are a relatively new product, and fill a market gap between traditional variable annuities (VAs) and fixed indexed annuities (FIAs). They offer the consumer more downside protection than VAs, while offering more upside opportunity than FIAs.

The session was presented by Ari Linder of Munich Re and Simpa Baiye of PwC. As both explained, a structured VA is constructed off of a reference market index. However, client funds are not invested in the index. Rather, the annuity writer creates index exposure through derivatives -- selling an out-of-the-money put option, and using the proceeds to purchase a call spread. The put creates downside protection; the call spread, upside opportunity. Client funds are invested in the annuity writer's general account. Investment income on the funds, along with product fees, is used to cover administrative expenses and profit margins.

I've simplified, of course. There is quite a lot more to the product, including variations in the product offering, operational details, typical sales channels, accounting treatment, and so on. However, what most interested me as a former risk manager is the product's risk profile for the annuity writer.

Similar to an FIA without living benefits, the structured VA writer bears very little market risk at the outset. The payoff to the client is mirrored by the payoff on the derivatives used to construct the product. Basis risk is minimal, because market indices are selected on the basis of derivatives market liquidity. Volatility and interest rate risk are mitigated because the writer can adjust the product parameters (cap, buffer, floor) at each reset -- and higher volatility can reasonably be expected to increase proceeds from the sale of the put as well as the cost of the call spread. That's not to say market risk disappears. As Baiye noted, there may be opportunities for an annuity writer to exploit offsetting payoffs on traditional VA products to offset risk internally and reduce hedging costs; this would require more active market risk management. And as with FIAs, there is a need for the annuity writer to aggregate annuity contracts into cohorts that are large enough to buy derivatives against. Writers will need to bear or hedge some market risk at the margins.

That said, the larger risk in structured VAs is one we know well at Ruark: Policyholder behavior risk. The product contains various disincentives to policyholders surrendering their policies, but there is always some surrender activity on financial products. Circumstances change -- both personal circumstances and market circumstances. So it makes sense for the annuity writer to buy derivatives on less than 100% of the exposure. But how much less? That depends on the annuity writer's assumptions about persistency.

Will policyholder behavior on structured VAs resemble that of FIAs? Or that of VAs? With or without living benefits? A case can be made either way, especially with the confluence of distribution channels for VAs, FIAs, and even structured retail products. Surely today's annuity writers are seeing experience, but how might that experience change in the future? As product sales grow -- they are currently about $8bn per year -- we can expect the question to grow in importance.

Image credits: Simpa Baiye, PwC

See you in Baltimore!

One of my favorite events is the Society of Actuaries’s annual conference on Equity-Based Insurance Guarantees. There’s always something to learn, and it’s a pleasure to see old friends. Ruark Consulting is a Silver sponsor of the conference again this year, so please stop by – whether to hear about highlights from our recent VA experience studies, or just to say hi!