2016 Fixed Indexed Annuity - Industry Study Summary

Key Observations – Surrender & Partial Withdrawal Behavior

  • Surrender Charge – early results show a clear dynamic. The presence of the Contingent Deferred Sales Charge (CDSC) keeps industry surrender rates in single digits. However, in the year following the expiry of the CDSC, average rates jump by a factor of 5. Since FIA CDSC periods tend to be long and thus industry experience relatively new, the story regarding the shock duration and ultimate rates is still developing.
  • Overall surrender rates declining slowly but steadily. Over the 8 years studied here, surrenders have declined. This is most apparent at the shock duration even with the limited credibility for earlier years mentioned above. But even in the years prior to the CDSC expiration, there has been a decline from high single digits by more than half in recent years.
  • Why the decline in surrender rates? The increasing prevalence of a living benefit rider has had the effect of making policies stickier. Additionally, the stock market recovery, leading to more favorable interest credited rates, has contributed to this pattern of declining surrender rates.
  • Especially the living benefit rider – The effects of the presence of living benefits are clear as surrender rates for policies with a living benefits rider are half the level of those without one.
  • Withdrawal utilization, living benefit rider vs. not – Contracts without a living benefit rider frequently take withdrawals – almost 1/3 of them do in an average year. They also take withdrawals of higher amounts than those with an LB rider. Policies that do have a rider tend to be active (prior to turning on lifetime income) as well, but at lower rates, in the realm of 1/4 of contracts.
  • Primary factors influencing FIA withdrawal behavior are attained age and tax status (regardless of LB presence), particularly on qualified contracts with owners over age 70. Duration since issue also has some effect but is of lesser consequence.

On the horizon – Items to keep an eye on for future FIA studies:

  • Credited interest rates – contracts with the lowest interest credited rates (<2%) had materially higher surrender rates, but that effect was limited to that bucket. Will the market recovery and accompanying higher credited rates consistently lead to more satisfied customers and so better persistency?
  • Living benefit value – the dynamic effect, where more valuable guarantees correlate with lower surrenders, is well-established in more mature markets such as variable annuities. This effect has been hard to discern so far with FIA living benefits due to the newness of the guarantees.  What will that dynamic curve look like as it develops?
  • Living benefit utilization – the incidence of FIA living benefit owners turning on lifetime income has been very low. Will that continue or will there be an uptick?  If the latter, what will be the triggers?

Participating companies:

  • AIG Life & Retirement
  • American Equity
  • Athene
  • EquiTrust
  • Forethought

  • Genworth
  • Midland National
  • Nationwide
  • Pacific Life
  • Phoenix
  • Protective
  • Security Benefit

Industry overview and methodology

Ruark’s FIA and VA industry studies include mortality, surrender, and partial withdrawal policyholder behaviors that are vitally important to the long-term financial performance of these products. Through the experience study results report and discussions with us, participating companies gain a detailed understanding of complex industry results and comparison to their own-company results for benchmarking purposes.

The number of FIA participating companies and volume of data studied has grown steadily since we started studying these behaviors in 2010. The 12 participating companies, contributed 10 million contract years of data for these latest studies, covering the period January, 2007 through September, 2015.

About us

Since 2007, Ruark has completed dozens of annuity experience studies that facilitated vital understanding of industry policyholder behavior.  We are recognized leaders in annuity risk management, policyholder behavior analytics, and reinsurance brokerage and administration.

Contact:  Joel Lagan | 860 930 5069 | joel@ruark.co | www.ruark.co


VA GLWB Product Debuts in New Zealand

The launch of New Zealand’s first variable annuity with guaranteed living benefits is imminent. The article is an overview article in the SOA International Section magazine.


Podcast 102 - Reinsurance for Mortality Volatility

We’re discussing the risk management challenges posed by mortality volatility for variable annuities. How can a mortality reinsurance program be structured to mitigate this risk and allow hedging programs to operate more effectively?


Podcast 104 - Tim Paris @ Life & Annuity Symposium

Tim Paris is interviewed after his session at the SOA Life & Annuity Symposium. They discuss annuity product design and policyholder behavior. Answering the question of “What is new and different?” and “How dynamics have changed with regard to industry perspective on living benefit guarantees”.


Press Release - Fall 2015 VA Study

Key Observations

  • Fairly Stable Surrender Rates over the past six years. Surrenders at the shock duration (the year following the end of the CDSC period) have remained fairly stable since the beginning of 2009.  This stability followed a steep decline from nearly 30% at the onset of the economic recession.  As the VA industry retrenched their product offerings in the wake of market volatility and low interest rates, contract owners no longer had ever-richer guarantee options within VA’s or attractive vehicles outside of VA’s to move to.
  • Effect of the moneyness and presence of a living benefit is notable. Contracts which are “in-the-money” (on an actuarial or nominal basis) with a GMIB or lifetime GMWB (GLWB) have much better persistency than those “out-of-the-money” or with other types of guarantees. GMIB’s have surpassed GLWB’s in this regard only in the past several years, with rates now a point and a half lower at the shock and nearly a point lower post-shock.
  • What is less important? Factors that are less significant for assumptions include attained age, gender, and contract size.  Even when surrender rate differences by these measures appear, they are explained away once the more significant factors of surrender charge and living benefit presence and value are accounted for.
  • Annual withdrawal frequency rates have been increasing over the past several years. Some of this change is due to demographics: frequencies go up with age.  However, even rates within age buckets have increased. GLWB riders are riskiest to the writing companies when contract owners take the full maximum annual withdrawal amount.  Utilization of the withdrawal feature continues to be less efficient in this way than initially expected, although efficiency is slowly increasing.  Overall, a bit less than half of annual withdrawals are at this maximum amount, while a third takes less than that.  The remaining 20% of withdrawals are in excess of the max, which degrades the guarantee for future years.
  • Principal drivers of GMIB annuitization are the relative value of the rider (“in the money-ness”) and attained age. Rider forms that allow partial dollar-for-dollar withdrawals have much lower exercise rates than those that reduce the benefit in a pro-rata fashion. The latter form emphasizes the availability of guaranteed income while retaining control of the account value, and so is more akin to a lifetime GMWB rider than a traditional GMIB.

Participating companies

AIG Life & Retirement

Allianz

AXA

Commonwealth

Genworth

Guardian

John Hancock

Mass Mutual

Met Life

Nationwide

New York Life

Ohio National

Pacific Life

Penn Mutual

Phoenix

Protective

Prudential

Security Benefit

Voya

Industry overview and methodology

Ruark’s studies include mortality, surrender, partial withdrawal, and GMIB annuitization –  policyholder behaviors that are vitally important to the long-term financial performance of variable annuity products, particularly with the burgeoning popularity of lifetime income guarantees such as GLWBs. Through the experience study results report and discussions with us, participating companies gain a detailed understanding of complex industry results and comparison to their own-company results for benchmarking purposes.

The number of participating companies and volume of data studied has grown dramatically. For example, Ruark’s GMIB Annuitization study captured 60% more exposure than 2014’s study.  Each company provided seriatim data files for the period January 2008 through June 2015.  We thoroughly scrubbed the data files and validated them with each company.  The 19 participating companies, representing approximately 70% of the industry, contributed 54 million policy years of data for the surrender study, and over 20 million policy years of data for the partial withdrawal study.

About us

Since 2007, Ruark has completed dozens of annuity experience studies that facilitated vital understanding of industry policyholder behavior.  We are recognized leaders in annuity risk management, policyholder behavior analytics, and reinsurance brokerage and administration.
Contact:  Joel Lagan | 860 930 5069 | joel@ruark.co | www.ruark.co


Podcast 103 - Product Design & Policyholder Behavior

Tim Paris discusses some of the nuance of annuity policy design and how the policyholder behavior risks associated with those features, can threaten profitability.


Podcast 101 - Managing Longevity Risk

Tim Paris, FSA, MAAA discusses the threat of longevity risk to annuity writers with living benefit guarantees and how mortality reinsurance can help mitigate this risk.


Don't Be Fooled by Forecasting

One of the things that I have always loved about mathematics, particularly in my quickly receding undergraduate days, is that there is almost always a right answer.  At least for the problems posed in math classes.  Usually the answer could be determined exactly.  Sometimes, you could only approximate it, and if you couldn’t do that, you could often at least prove that it exists.  And every now and then, you’d just have to take solace in the fact that you could prove that there is no solution.  At least that’s something.  That type of certainty is comforting to the young and idealistic, and to those who limit themselves to tidy categories of problems.

The passage of time and accumulation of experience has broadened my perspective.  While I still enjoy finding an exact and correct answer when the opportunity for that luxury presents itself (balancing the checkbook, reviewing my kids’ homework, etc.), I have come to recognize that these situations are not the norm in the real world.  All of us, including, and perhaps especially, actuaries – highly trained professionals in the fields of mathematics and finance, engineers of the insurance industry, and Jedi knights of the risk management profession – are surrounded by intractable problems.  By intractable, I don’t mean that these problems cannot be solved, at least partially.  I mean that they are not amenable to an exact and correct solution that can be determined in advance.

All too often, when the mainstream media mentions the actuarial profession, a trite description like “the folks who set your insurance rates” or “the folks who predict your life expectancy” is often used.  The inference, often quite direct, is that actuaries are capable of predicting the future.  Actuaries naturally scoff at this characterization, as we know that it is absurd, but I think that a fair number of us secretly enjoy the mystical powers that are ascribed to us.  All of which contributes to a general notion that actuaries and other mathematical and financial wizzes are capable of predicting the future and eliminating risks.

The good news is that we cannot.  No one can.

Why is this good news?  It is good news because risk is the flip side of opportunity.  A business without risks is impossible, whether we care to admit it or not.  And even if it was possible, it would be a business without opportunity for gains.  The gains that businesses earn from opportunities are in compensation for the risk of losses.  Moreover, a business can be characterized as a decision, explicit or implicit, to participate in certain types of risks.

Which risks, and to what extent?  Those are the real questions.  Any entrepreneur or business leader understands this intuitively.  The actuary’s role is to plumb the depths of these questions, determine and implement answers that are appropriate for the business given its risk appetite, and review, learn, and modify over time.  Historically, much of the work of actuaries has centered around management of specific risks in the insurance industry, but there is no reason for this limitation prospectively.  Business risks are all around us – materials supply, delivery logistics, financial liquidity, competitive analysis, customer behavior, and the list goes on.  Actuaries can help evaluate and manage these risks, even if they can never be fully eliminated.  Actuaries can identify the cost-benefit trade-offs that are central to the risk management process for any business.  And perhaps most importantly, actuaries can help identify and manage the other risks – the ones that are very subtle, perhaps possibilities that we have never wanted to see or consider before.

The job of the actuary is to see the world as it is, and help manage business opportunities and risks realistically.  The job is not to do exhaustive calculations for their own sake, or impart a false sense of precision to complex financial projections, or just “run the model”.  The job is to think and do, sometimes with the aid of rigorous mathematical and financial techniques, but avoid being fooled about what is and what can never be.  Can your business use this?