When Is Your Own Data Not Enough?

Published in The Actuary magazine of the SOA, June/July 2018.

How using external data can strengthen results.

Related notes:

  • Our spring 2018 VA and FIA industry experience studies included over $1.1 trillion in current account values.  Highlights and media coverage.
  • Triennial VA and FIA mortality studies are on the way this summer.
  • We continue to be very busy with client work, developing customized predictive models that balance relevant industry-level data with company- and product-level data, with quantifiable improvement in goodness-of-fit and predictive power relative to company-only data.  Like hedging and reinsurance, this is an investment in risk management, not an expense.
  • Details to come of our plans for 2019, including expansion to other products such as traditional fixed deferred and payout annuities.
  • Contact us with feedback or to learn more about participation or purchase.



Variable annuity deferral bonuses are working

Check out the article the Retirement Income Journal published regarding our Spring 2018 variable annuity (VA) policyholder behavior study.  Go to the article.


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Spring 2018 Variable Annuity Study Results

Insurer Incentives Delay Lifetime Benefit Commencement

SIMSBURY, CT, May 29, 2018 – Ruark Consulting, LLC today released the results of its spring 2018 studies of variable annuity (VA) policyholder behavior. The studies, which examine the factors driving surrender behavior, partial withdrawals, and annuitization, were based on experience from 13.9 million policyholders spanning the period January, 2008 through December, 2017. Twenty-five variable annuity writers participated in the study, comprising $948 billion in account value as of December, 2017.

“A variable annuity writer’s cost to provide guarantees depends on policyholder behavior, including surrender and income utilization,” said Timothy Paris, Ruark’s CEO. “Each company should ask itself the basic question – is my own data enough?”

Study highlights include:

  • As the market for guaranteed lifetime withdrawal benefit (GLWB) riders matures, it is possible to see the effects of long-dated insurer incentives to delay benefit commencement. Commencement rates are low overall, 12% in the first policy year and falling to 6-7% annually thereafter. However, usage jumps over 5 points in year 11, with the expiration of ten-year bonuses for deferring withdrawals common on many riders. In this study, we see for the first time that commencement frequency thereafter falls to an ultimate rate of about 9%. The deferral bonuses appear to have the intended effect of delaying benefit utilization. Among contracts that take a withdrawal, nearly 90% continue withdrawals in subsequent years.

  • Overall living benefit annual withdrawal frequency rates have continued to increase, and utilization has grown more efficient. Withdrawal frequency for guaranteed lifetime withdrawal benefit riders is now 25%, up nearly two points over the rate reported in Ruark Consulting’s spring 2017 study and three points over the spring 2016 value. GLWB withdrawal frequencies have increased consistently at normal retirement age and above. Most of the increase is attributable to more efficient utilization of the rider benefit, with over half of withdrawals now at or near the maximum benefit amount.

  • The effects of moneyness (account value relative to the guarantee base) on partial withdrawal behavior differ depending on circumstances. When contracts with lifetime withdrawal benefits are at- or in the money, policyholders increase the frequency of standard benefit withdrawals. This is consistent with greater benefit exercise when the benefit is more valuable. The effect is more pronounced after the expiration of deferral incentives. In contrast, when contracts move out of the money, withdrawals in excess of the maximum amount are more common. This is suggestive of policyholders taking investment gains out of the contract.

  • Overall variable annuity surrender rates in 2017 have returned upward to post-crisis levels, following a secular dip in 2016. We see three regimes in the study window: Surrenders at the shock duration (the year following the end of the surrender charge period) were nearly 30% at the onset of the 2008 economic crisis; shock rates below 10% were observed during 2016; and otherwise a post-crisis regime has prevailed, with shock rates in a range of 12-16% from 2009 through mid-2015 and 13% in 2017. The 2016 dip, first observed in Ruark’s fall 2017 study, is only partially attributable to benefits moving more in-the-money during the year; it is likely that uncertainty surrounding the DOL’s proposed Fiduciary Rule and political factors encouraged a “wait-and-see” attitude among many policyholders and advisors.

  • The presence of a living benefit rider has a notable effect on surrender rates; contracts with a lifetime benefit rider have much higher persistency than those with other types of guarantees. Also, a contract’s prior partial withdrawal history influences its persistency. Contracts with a lifetime benefit rider that have taken withdrawals in excess of the rider’s annual maximum have surrender rates three points higher overall than other contracts with those riders.  In contrast, those who have taken withdrawals no more than the rider’s maximum have the lowest surrender rates (three points lower at the shock, for example, compared to contracts who have taken no withdrawals).
  • When calculating relative value (moneyness) for lifetime withdrawal guarantees, use of a nominal measure can be deceiving. A nominal measure fails to reflect important aspects of living benefit design, and can be inflated over time as the benefit base remains unchanged even as the account value is reduced through regular withdrawals. It may be preferable in many cases to use an actuarial measure of moneyness that incorporates interest and mortality rates. Actuarial moneyness exhibits a similar dynamic effect on lapse though with notable differences in shape. As an actuarial basis pushes a contract toward out-of-the-money by discounting the guarantee, very little exposure exists for heavily ITM contracts: nominally, 77% of GLWB exposure is in-the-money, while only 10% is in-of-the-money when measured on an actuarial scale.
  • Annuitization rates on policies with guaranteed minimum income benefit (GMIB) riders continue to decline. The overall exercise rate for the riders with a 10-year waiting period is 2.1% by account value. Rates have been falling steadily since 2010, and quarterly observed rates have stayed at or below 2% since 2014. “Hybrid” rider forms that allow partial dollar-for-dollar withdrawals have much lower exercise rates than tradition forms, which reduce the benefit in a pro-rata fashion – less than 1% for hybrid, vs. 5% for pro-rata; the increasing share of exposure in the study from the hybrid type is a partial explanation for the decrease in annuitization rates over time.

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 (timothyparis@ruark.co).

Our recent FIA Study is in the news

Retirement Income Journal - Behavior risk is rising for FIA living benefit issuers: Ruark

The amount of client assets protected by a GLIB outside the surrender charge period—a measure of the rising behavioral risk exposure for FIA issuers—increased 82% from 2017 to 2018, according to Ruark.  Read More or view a pdf of the the article here.

InsuranceNewsNet - Annuity Owners More Likely To Hold On To Benefit Riders

Owners of fixed indexed annuities (FIAs) with guaranteed living income benefit (GLIB) riders are much less likely to surrender their contracts than they were 10 years ago, according to new research based on 3.3 million policyholders. Read More


Living benefit riders boost persistency


Living benefit riders boost persistency

SIMSBURY, CT, March 5, 2018 – Ruark Consulting, LLC today released the results of its 2018 studies of fixed indexed annuity (FIA) policyholder behavior. The studies, which examine the factors driving surrender behavior and income utilization, were based on experience from 3.3 million policyholders spanning the period January, 2007 through September, 2017. A record 16 fixed indexed annuity writers participated, comprising $215 billion in account value as of September, 2017.

“Getting actuarial assumptions right can mean the difference between profitability and anti-selection, or between overhedging and underhedging,” said Timothy Paris, Ruark’s CEO. “Ruark’s studies use industry data to provide greater insight, and more predictable and stable results, than companies can achieve when they limit themselves to their own experience.”

Ruark’s FIA studies cover products both with and without a guaranteed living income benefit (GLIB). GLIB exposure outside the surrender charge period increased 82% in this edition over 2017.

Study highlights include:

  • Overall industry surrender rates have exhibited a secular downward trend since 2007. Surrenders at the shock duration (the year following the end of the contractually defined surrender charge period) have fallen from over 50% in 2007 to 15-25% in recent quarters, and surrender rates during the surrender charge period have fallen from high single digits to below 3%. We note an industrywide dip in surrenders in 2016 and rebound in 2017; it is likely that uncertainty surrounding the DOL’s proposed Fiduciary Rule and political factors encouraged a “wait-and-see” attitude among many policyholders and advisors.
  • The presence of a living benefit rider has a notable effect on surrender rates; contracts with a guaranteed living income benefit (GLIB) have much better persistency than those without. Surrender rates during the surrender charge period for contracts with GLIBs are less than half those of contracts without the guarantee. Among contracts that have begun taking income withdrawals, persistency is better still; shock duration rates are approximately 15%, as compared to 26% for contracts without GLIB.
  • Credited rates have a discernable effect on surrenders. As in past studies, we note that contracts earning less than 2% exhibit sharply higher surrenders than those earning more. Additional experience in this study reveals differentiation among contracts with higher returns, as well.
  • The in-the-money effect, by which owners have higher persistency when the account value is below the guarantee base, is subtle in the case of FIAs. We find that using an actuarial moneyness basis, which discounts guaranteed income for interest and mortality rates, has much greater predictive power than a nominal measure.
  • GLIB benefit commencement rates are low: 7% overall in the first contract duration and then falling to the 2% range in years 3-10. Notably, although experience is limited, exercise rates spike in year 11, suggesting that benefit bonuses may be effective at delaying exercise. When a living benefit contract does begin taking withdrawals, it is likely to continue in subsequent years; average continuation rates are near 100%. However, utilization of the benefit is far from fully efficient. A significant proportion withdraw income in excess of the contractual guarantee, which degrades value of the guarantee in future years.
  • Commencement rates vary considerably by age and by contract size. They are also influenced by the in-the-money effect. Exercise rates increase sharply when contracts move deep in the money, as policyholders recognize the economic value of the income guarantee.
  • FIA contracts typically offer the opportunity to take 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 guaranteed living income benefit (GLIB) rider. Base contract withdrawals have been largely stable over the past decade. Behavior differs subtlely across four groups: Those taking the full penalty-free amount; those taking less; those taking excess; and those for which no penalty applies.
  • Free partial withdrawal activity on the base contract is influenced by age and required minimum distributions, as well as contract size. 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 jump 8 percentage points following the end of the surrender charge period.

Detailed study results, including company-level analytics, are available for purchase by participating companies. For further information, please contact Timothy Paris, CEO.
Contact Tim

Actuary Professional Code of Conduct

The Real Code

 Ruark Code of Conduct

As part of the continuing education that is required for me to maintain my US actuarial credentials, I typically spend about an hour each year meditating on the

Code of Professional Conduct.  Unlike most of the regulations, practice standards, guidance notes, memoranda, presentations, and work products with which we so often must grapple in our daily work, the Code is concise, easy to read, and vital.  And therein lies its power to clearly define what it means to be an actuary, and hence, what is not an actuary.

The Code has been effective since January 2001, replacing prior versions which dated back many years.  Yet like returning to the great literary classics, subsequent readings of the Code continue to offer new insights into timeless challenges, and received wisdom to apply to new challenges.  For this, actuaries, their clients and employers, and the public owe the committee of authors an enduring debt of gratitude.

With actuarial work increasingly reliant on, and sometimes competing against, computer-based algorithms, artificial intelligence, and myriad techy buzzwords (including at my own company!), I think that the Code is more valuable than ever.  But don’t take my word for it.  It’s only four pages -- read it for yourself.  Read it for your clients and employers.  Read it for the public.  Then ask yourself -- am I living up to this high standard of conduct?  Can algorithms, computers, or other merely math-savvy people replace this professionalism?

I used to read the Code with a rote objective of fulfilling my continuing education requirements.  Now I know better.  I read and reread it as the animating spirit of our profession, so that no matter what my work is, or what technological tools (dare I say computer code) and professional judgment I use to carry it out, I am ever mindful of the high standards I must maintain to be an actuary and the importance of my work to the greater good.

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!

More VA Owners Are Tapping Their GLWBs For Retirement Income

Our recent VA study results have been in the news lately. Check out the article in InsuranceNewsNet.com & AdvisorNews.com