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

https://insurancenewsnet.com/innarticle/va-owners-tapping-glwbs-retirement-income#.WfiRrGhSyUk


Annuity Study Results Released

RUARK CONSULTING RELEASES ANNUITY STUDY RESULTS
Surrender rates increase in 2017, following 2016 dip

SIMSBURY, CT , October 17, 2017 – Ruark Consulting, LLC today released the results of its fall 2017 studies of variable annuity policyholder behavior. The studies, which examine the factors driving surrender behavior, partial withdrawals, and annuitization, were based on experience from 13.8 million policyholders spanning the period January, 2008 through June, 2017. A record 25 variable annuity writers participated in the study, comprising $905 billion in account value as of June, 2017.
“Our client annuity writers are finding that it is more important than ever to have an evidence-based methodology for assumption-setting,” said Timothy Paris, Ruark’s CEO. “The industry is also better appreciating the importance of policyholder behavior risk in variable annuity risk management. And as always, getting pricing assumptions right can mean the difference between profitability and unprofitable anti-selection. RCL’s industry studies provide greater insight, and more predictable and stable results, than companies can achieve by limiting themselves to their own experience when setting assumptions.”

Study highlights include:

  • Overall industry surrender rates in the first half of 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 contractually defined surrender charge period, or CDSC) 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% so far in 2017. The 2016 dip 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 four 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).

  • Annuitization rates on policies with guaranteed minimum income benefit (GMIB) riders are low and getting lower. The overall exercise rate for the riders with a 10-year waiting period is 2.2% by account value. Rates have been declining 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. 6% 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.

  • Overall living benefit annual withdrawal frequency rates have continued to increase, primarily as a result of increasing utilization efficiency. Withdrawal frequency for guaranteed lifetime withdrawal benefit riders is now over 24%, an increase of two percentage points over the past 18 months. GLWB withdrawal frequencies have increased within each cohort of age and tax status, particularly at normal retirement age and above, suggesting the increase is secular. 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.

  • Lifetime withdrawal benefit commencement is low, 12% overall in the first duration and then falling to the 6-7% range in subsequent years. As first noted in Ruark Consulting’s spring 2017 study, exercise rates spike after year 10, indicating that benefit bonuses are effective at delaying exercise. Among contracts that take a withdrawal, nearly 90% continue withdrawals in subsequent years.
  • 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. 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.

Detailed study results, including company-level analytics, 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.


Ruark Consulting Releases Annuity Study Results - PRESS RELEASE

# FOR IMMEDIATE RELEASE #

RUARK CONSULTING RELEASES ANNUITY STUDY RESULTS

Surrender rates increase in 2017, following 2016 dip

SIMSBURY, CT , October 17, 2017 – Ruark Consulting, LLC today released the results of its fall 2017 studies of variable annuity policyholder behavior. The studies, which examine the factors driving surrender behavior, partial withdrawals, and annuitization, were based on experience from 13.8 million policyholders spanning the period January, 2008 through June, 2017. A record 25 variable annuity writers participated in the study, comprising $905 billion in account value as of June, 2017.

“Our client annuity writers are finding that it is more important than ever to have an evidence-based methodology for assumption-setting,” said Timothy Paris, Ruark’s CEO. “The industry is also better appreciating the importance of policyholder behavior risk in variable annuity risk management. And as always, getting pricing assumptions right can mean the difference between profitability and unprofitable anti-selection. RCL’s industry studies provide greater insight, and more predictable and stable results, than companies can achieve by limiting themselves to their own experience when setting assumptions.”

Study highlights include:

  • Overall industry surrender rates in the first half of 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 contractually defined surrender charge period, or CDSC) 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% so far in 2017. The 2016 dip 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 four 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).
  • Annuitization rates on policies with guaranteed minimum income benefit (GMIB) riders are low and getting lower. The overall exercise rate for the riders with a 10-year waiting period is 2.2% by account value. Rates have been declining 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. 6% 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.
  • Overall living benefit annual withdrawal frequency rates have continued to increase, primarily as a result of increasing utilization efficiency. Withdrawal frequency for guaranteed lifetime withdrawal benefit riders is now over 24%, an increase of two percentage points over the past 18 months. GLWB withdrawal frequencies have increased within each cohort of age and tax status, particularly at normal retirement age and above, suggesting the increase is secular. 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.
  • Lifetime withdrawal benefit commencement is low, 12% overall in the first duration and then falling to the 6-7% range in subsequent years. As first noted in Ruark Consulting’s spring 2017 study, exercise rates spike after year 10, indicating that benefit bonuses are effective at delaying exercise. Among contracts that take a withdrawal, nearly 90% continue withdrawals in subsequent years.
  • 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. 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.

Detailed study results, including company-level analytics, are available for purchase by participating companies.

Ruark Consulting, LLC (www.ruark.co), based in Simsbury, CT, is an actuarial consulting firm specializing in principles-based insurance data analytics and risk management. Since 2007, Ruark’s industry- and company-level experience studies of the variable annuity and fixed indexed annuity markets have served as the industry benchmarks. Its behavioral analytics engagements range from discrete consulting projects to full-service outsourcing relationships. As a reinsurance broker, Ruark has placed and continues to administer dozens of bespoke treaties totaling over $1.5 billion of reinsurance premium and $30 billion of account value, and also offers reinsurance audit and administration services.

Ruark’s consultants are frequent speakers at industry events on the topics of longevity, policyholder behavior, product guarantees, and reinsurance. Their work and commentary have appeared in numerous industry publications. Ruark Consulting enjoys an ongoing collaboration with the Goldenson Center for Actuarial Research at the University of Connecticut, and is a member of the Bermuda International Long Term Insurers and Reinsurers Association.

# # #

FOR FURTHER INQUIRIES, CONTACT:

Timothy Paris, FSA, MAAA
CEO, Ruark Consulting, LLC
timothyparis@ruark.co
860.866.7786
www.ruark.co


SOA - Equity-Based Insurance Guarantees Conference

We are very pleased to again sponsor and speak at the upcoming SOA Equity-Based Insurance Guarantees Conference, Nov 6-7.  Hopefully see you there!


2018 Service Expansion and Enhancements

A year ago, we introduced new customized services in order to help our clients answer one simple but vital question:

How can we translate complex and dynamic experience data into coherent assumption models?

We all know why this is so important and essential for those responsible for new product pricing and competitiveness, quantification and management of inforce risks, and more predictable reserves, capital, and corporate financial performance. But how to do it is a very difficult question to answer using only traditional methods, even for us, with seriatim monthly data since 2007 covering approximately 70% of the US annuity market. Enter predictive analytics.

Combining these techniques with traditional methods in a collaborative and transparent process, we develop and help clients implement coherent assumption models that are based on relevant segments of industry data and tailored to each company’s product mix and situation, and that are flexible enough to accommodate the emergence of new data. These models include partial withdrawal and income utilization behavior under GLWB and similar longevity-based guarantees, with strong goodness of fit and predictive power. And the prudent use of industry data allows us to fill credibility gaps and provide metrics that demonstrate that these models are typically better than what individual companies can do using only their own data. This is why we are here.

We aim to be the platform and industry benchmark for principles-based insurance data analytics and risk management.

We encourage you to consider our services as customized investments in risk management. The benefits are quantifiable in terms of actual-to-expected ratios, product pricing, hedging efficiency, reserves, and capital.

Building on our strengths in the US annuity market, we are pleased to announce our plans to further expand and enhance our services in 2018:

  • Simplified pricing for variable and fixed indexed annuity experience studies of policyholder behavior, assumption models, and benchmarking. As always, our services will address the many factors of influence and their changes over time, including product and guarantee type, surrender charge period and duration, moneyness of guarantees on actuarial and nominal bases, contract size, tax status, age, gender, distribution channel and compensation structures, and income utilization and efficiency. This covers industry data and customized analysis for each client’s own data. Our industry data is more comprehensive than ever, as we have recently added several new clients totaling well over $100 billion in account value.
  • New mortality studies for both variable annuities and fixed indexed annuities, most recently completed in 2015 and 2016, respectively. This will include analysis relative to the Ruark Mortality Table for Variable Annuities, which we know many clients have adopted for assumption purposes.
  • As we remain committed to analytical excellence, useful delivery timing, and production speed in the services above, we aim to further automate our data gathering and scrubbing, shorten cycle times, and introduce new dashboard services that use clustering techniques to quickly benchmark and identify experience outliers for further investigation. This will not replace full-blown experience studies and related analytics, but would bring the whole endeavor much closer to real time, and improve our clients’ ability to take management actions earlier. These services will transcend product lines, and are part of our continued collaboration with the Goldenson Center for Actuarial Research at the University of Connecticut, a designated Center of Actuarial Excellence by the Society of Actuaries.
  • Begin gathering industry experience data for other products, such as traditional fixed deferred annuities, payout annuities, life insurance, and pensions, in the US and other jurisdictions. As these reach critical mass, we plan to offer similar studies and services as above.

2018 VA and FIA Behavioral Services

For each of:
VA Surrenders                       FIA Surrenders
VA Income Utilization          FIA Income Utilization
VA Mortality                          FIA Mortality
VA GMIB Annuitization
Option
Standard Premium

 

Experience Studies – industry results in aggregate, along with your company results, in a detailed report with numerical exhibits covering key factors, cohorts, and dynamics
Customized assumption model – initially calibrated to industry results, and tailored to your company based on credibility techniques
Review of your current assumptions, and comparison to the customized model above
Benchmarking of your results relative to peers
Presentation and discussion with our team
Membership on our Behavioral Analytics Advisory Council


Presentation slides from SOA Life and Annuity Reinsurance Seminar

Thanks to so many of you who attended the SOA Life and Annuity Reinsurance Seminar in NYC a couple of weeks ago. Tim's presentation slides on modeling and managing policyholder behavior risk are here. https://www.soa.org/prof-dev/events/2017/reinsurance-seminar/agenda/


A busy September is coming up. Hope to see you in our travels...

Eric Halpern and Tim Paris will be moderating a few sessions at the SOA's first-ever Predictive Analytics Symposium, and we are delighted to be one of the corporate sponsors for this exciting event.

Tim Paris will be attending the BILTIR Life and Annuity Conference. Keynote speaker is a long-time favorite of our's and many...

Both events are still open for registration.

Date
September 14 - 15, 2017

Location
Swissotel Chicago
Chicago, IL

Date
September 19, 2017

Location
Southampton
Bermuda

 


Organizational news at Ruark

Hi folks, a few quick updates so you are acquainted with who's doing what for you in our shop: * Sally Osit has taken on the new role of Chief Administrative Officer, responsible for centralized functions such as project management, IT, HR, and administration for Ruark's large block of annuity reinsurance treaties. * Eric Halpern has recently joined us as Chief Operating Officer, responsible for leading our consulting operations, with a primary focus on policyholder behavior analytics, including industry- and company-level experience studies, predictive modeling and assumption model development, and related client projects. The rest of our team is still here and as vital as ever, myself hopefully included. Congratulations to Sally and Eric in their new roles. We know that these changes will help us to more efficiently provide the excellent products and services that you have come to know and expect from us. Please feel free to contact any of us with questions. Tim