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






John Hancock

Mass Mutual

Met Life


New York Life

Ohio National

Pacific Life

Penn Mutual




Security Benefit


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 | |

Variable & Indexed Annuity Reinsurance

While effective hedging of investment risks has rightly been the focus of variable annuity companies for the last few years, the enormous longevity risk implicit in living benefit guarantees has gone largely unnoticed and unmanaged.  This longevity risk is due to the fact that if and when living benefit guarantee claims are triggered, they typically take the simple form of a life annuity.  While this helps retirees mitigate the risk of outliving their assets, variable annuity companies risk that long-term increases in human longevity will outpace the level of longevity priced into the living benefit guarantee.

Three facts exacerbate this risk:

  1. There is no industry experience for living benefit guarantees in the payout phase;
  2. Industry mortality experience in the accumulation phase does not follow standard mortality tables;
  3. Demographers have a long history of severely underestimating mortality improvements, by as much as 5 years life expectancy at birth.[1]

Let’s quantify with a simple example.  With the illustrative assumptions of a male age 60 buyer and that claims are very unlikely to be triggered in the first ten years, the corresponding underestimation of life expectancy in the payout phase is 2.1 years[2].  For a $10 billion premium block of 5% living benefit guarantees, we would expect perhaps 67% still inforce after 10 years.  So the additional 2.1 years of payments would cost the variable annuity company $700 million ($10 billion x 5% x 67% x 2.1 years)!  This is equivalent to an additional cost of 1.40% annually on the declining asset balance, for a feature with only about a 1.00% policyholder charge.

We do not think that this level of longevity risk is within the risk appetite of many variable annuity companies.  How can it be managed?  Longevity reinsurance.  Similar to longevity swap products in the pension market, the variable annuity company and reinsurer would essentially swap the contingent living benefit guarantee payments modified for longevity deviations relative to a negotiated benchmark.

Some modifications would be necessary for the variable annuity living benefit guarantee market.  For variable annuities, we would expect the benchmark to reflect a customized blend between industry mortality experience in the accumulation phase and standard mortality tables in the payout phase, such as the Ruark Mortality Table and 2012 Immediate Annuity Table.  The reinsurance volume and coverage period would be set at the start of the transaction in order to mitigate policyholder behavior risk.  For example, the variable annuity company might expect that a $10 billion premium block of 5% living benefit guarantees would likely have 55-67% still inforce when the earliest claims are triggered after 10-15 years, so they might seek longevity reinsurance for $275 million ($10 billion x 5% x 55%) of annual lifetime payments triggered in that period.  Longer deferrals of the coverage period would naturally result in more conservative pricing, and reinsurers would likely require a modest premium stream as compensation for the risk that the payout phase is never triggered.

This type of longevity reinsurance is a creative extension of our expertise in the development, placement, and administration of mortality reinsurance.  We believe that as variable annuity companies recognize the enormous longevity risk embedded in living benefit guarantees, longevity reinsurance will join hedging programs and mortality reinsurance as indispensable modern tools for the management of their investment and insurance risks.  If you would like to learn more about how we can design and implement a longevity reinsurance program to meet your company’s needs, please contact:

Tim Paris, FSA, MAAA
Chief Executive Officer
(860) 866-7786

[1] Brian C. O’Neill, Deborah Balk, Melanie Brickman, and Markos Ezra, “A Guide to Global Population Projections”, Demographic Research, 4, p. 203-288, 2001.  Chris Shaw, “Fifty Years of United Kingdom National Population Projections:  How Accurate Have They Been?”, Population Trends, 128, Office for National Statistics, 2007.

[2] Timothy Paris, “Modern Variable Annuity Risk Management”, p. 6, 2012.

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.

High Stakes

For actuaries and other risk managers in the insurance and reinsurance industries, these are exciting times.  Perhaps too much so!

Let us count the ways:

  • Equity markets are frothy, interest rates continue at historic lows, and “implied vols” are back down around pre-crisis levels.

  • The Fed continues to taper its quantitative easing to about 65% of last year’s levels, while the unemployment rate is now below 7% and inflation is only about 1%.

  • Solvency standards are in flux globally.  Details for major jurisdictions are very much under debate and will probably vary, but we seem to be headed toward a world of computationally intensive and data-driven dynamic solvency assessments based on assumptions sets and stress tests that are attuned to economic conditions and the full range of product, investment, and operational risks across the enterprise.

  • The reinsurance markets, an important and enduring part of the insurance industry’s risk management arsenal, face their own challenges:  continued consolidation among major life reinsurers and a decade of increasing retention rates by direct writers; meanwhile, the P&C reinsurance market is bearing the brunt of competition from non-traditional capital markets sources, creating pressure to expand beyond well-trodden markets while maintaining underwriting discipline.

  • Private equity investors have increased their presence in the life and annuity market, often with the aim of gathering assets to manage, prompting speculation about how their investment horizon and business strategy may contrast with that of traditional insurance shareholders.

  • Some inforce annuity products have become so problematic for insurers that they are offering to “buyout” policyholders in cash or in exchange for a different product.  This for long-term guarantee products that could be inforce for decades!  Some insurers have resisted this urge, noting the irony of these “buyouts” relative to their usual objectives of positioning themselves as long-term solid.

  • On the heels of adverse results in the variable annuity industry since the crisis, the phrase “policyholder behavior risk” has entered the lexicon of the C-suite and equity analysts, heightening the importance of actuaries and complex data analytics.  More broadly, risk management decisions are made much higher in the organization and with much greater collective scrutiny and strategic thinking than in years past.

High stakes, high degree of difficulty, and high visibility!

Are you and your company going it alone?  Do you have the internal knowledge and bandwidth needed to synthesize complex market and risk dynamics, and develop and implement appropriate risk management programs for your company?  Are your plans based on stale information and techniques, subject to internal biases or blind spots?  Are you connected with the right potential counterparties globally for various types of risks, including emerging risks such as longevity and policyholder behavior?  Do you know what you don’t know?  Do your competitors?

At Ruark, we help our insurance company clients face these difficult issues head-on, armed with wisdom from successfully completing bespoke risk management projects since 1998, a strong reputation and deep connections across the rapidly-evolving sectors of the insurance and reinsurance industries, and a combination of advanced technical and data analysis skills and creative business development acumen.  These efforts are complemented by the actuarial consulting services and industry-leading experience studies of policyholder behavior performed by our affiliate Ruark Consulting.

In times like these, don’t go it alone or with the usual +1.


Fixed Indexed Annuity (FIA) Reinsurance

Fixed annuity and indexed annuity reinsurance is a market where Ruark Insurance Advisors has significant experience, along with variable annuities and life insurance.  This article reviews the basic parameters that a direct writer should understand in order to evaluate the applicability of fixed and indexed annuity reinsurance to their situation.

Annuity reinsurance is a tool to manage required capital, surplus strain and a company’s balance between asset risks and insurance risks.  Limiting sales volumes can achieve similar results but may conflict with strategic needs to maintain or grow sales volumes and to enhance relationships with distributors.

Quota share reinsurance of all inherent risks is the most common structure.  This is a permanent transaction where the reinsurer would be on the risk for their share of asset performance, disintermediation, expense and persistency; and would receive their share of the evolving profits.  Business covered can be an inforce block, new business flow or a combination.

Most of the reinsurers active in the fixed and indexed annuity market consider investment management to be one of their core strengths, so the direct writer must be willing to include the reinsurer in asset management.  Assets can either stay on direct writer’s books with an agreement on who will manage them, or assets can be transferred to the reinsurer.  If assets are transferred to the reinsurer, Ruark Insurance Advisors recommends that a trust be established for the benefit of the direct writer.  The requirements of such a trust should go beyond the regulatory trust requirements for receiving reserve credit, and should be geared towards the likelihood of the assets in the trust being sufficient to satisfy the reinsured liability.

Fixed and indexed annuity reinsurance programs are time consuming to negotiate.  Prior to considering reinsurance, maintaining and maximizing profits on annuity business consumes significant senior management time.  The direct writer and a reinsurer must develop an understanding of how this management protocol will be shared.  Negotiation of a reinsurance program should be expected to take a minimum of six months, and sometimes considerably longer.

Fixed and indexed annuity reinsurers are not typically the normal North American life mortality reinsurance players.  Ruark Insurance Advisors can help a direct writer identify appropriate reinsurers.  Treaty terms and structures vary, with heavy reliance on negotiations specific to the facts and circumstances of each direct writer’s situation.  Ruark Insurance Advisors has the experience to guide our clients through these discussions.

Plotting Risk Management: The Variable Annuity Market in Five Acts

The 21st century actuary -- highly trained expert in mathematics, finance, insurance, and risk management; quantitatively astute skeptic and business person; playwright -- wait a minute.  Perhaps we’re getting carried away.  The actuary as playwright?!

Yes, it’s quite possible, in a manner of speaking.  Let’s consider the plot arc of the last decade of the variable annuity market in five acts.

First, the exposition:  in the United States, variable annuities are tax-favored retirement savings products with a central investment component, often accompanied by additional guarantees in the form of a death benefit or lifetime income stream.  Fundamentally, the purpose of these products is to help individuals manage their retirement savings through tax-deferred investment earnings in the accumulation phase and a lifetime income stream in the retirement phase.

The action rose as these products evolved dramatically from their earliest forms decades ago:  what was once a handful of simple mutual fund-like investments with the benefit of tax deferral was replaced by a dizzying array of investment options surrounded by dozens of types of guaranteed death benefits and lifetime income benefits.  In the years leading up to the financial crisis, product competition and growth were very strong, with sales increasing from $129 billion in 2003 to $184 billion in 2007 (source:  LIMRA).  With these volumes, variable annuities transformed from a complementary product line to a position at center stage for the insurance companies offering them and for the insurance industry at large.

The financial crisis was the climax, and exposed the massive and complex risks embedded in these products.  As global equity markets and interest rates declined precipitously, the value of the guarantees that were provided to variable annuity policyholders increased in value, but the value of insurers’ investment assets failed to keep up.  The industry buckled, as several companies reported losses of hundreds of millions of dollars, and many that had been leaders in variable annuity sales significantly curtailed or closed to new sales.  Sales dropped to $128 billion in 2009.

In the falling action since then, the industry seems to have gradually and reluctantly found a new normal, with “de-risked” products featuring more modest guarantee features around simpler investment options, with higher charges to policyholders.  Sales have increased to $147 billion in 2012.  But this is hardly a resolution.  As a result of the last decade of drama, shareholders, regulators, and rating agencies have become keenly aware of the risk dynamics for these products.  In spite of a reasonable recovery in terms of sales and product re-design, the industry still has about $2 trillion of inforce variable annuity assets of the old vintages that were so problematic during the last financial crisis (source:  IRI).  What is to prevent the next financial crisis from triggering catastrophe for the variable annuity market?

That is the question for the variable annuity industry.  And it is most pointedly the question for its actuaries.  How will these actuaries, uniquely qualified through their powerful combination of quantitative risk management skills, business savvy, and insurance heritage, write a creative denouement that avoids a tragic ending?  I’ll share mine in the next post.

Uncommon Sense

The funny thing about this risk management stuff is that everyone is supposedly doing it already. In business, from the solo practitioner or individual employee, to the department manager, to the chief executive, everyone has their internal compass as to what they should be doing or avoiding, or what specific result would constitute failure or success. Most people call this common sense.

Find XBut common sense can be surprisingly uncommon and inconsistently applied. Modern principles of risk management emphasize the importance of laying things out explicitly, in advance, taking actions that are consistent with these objectives, then monitoring progress and making adjustments over time. Sometimes the actions need to be adjusted, but sometimes the objectives do too. Even the most well thought out plan and risk management strategy will need to be changed eventually. Here is where we can easily slip off into abstract philosophical ruminations or highly technical risk management methodologies that would be virtually impossible for most business people to implement. I’m more of a pragmatist so let’s just start with the idea of questioning our assumptions, which is the bedrock of a sound risk management strategy.


Fragile or unrealistically precise assumptions are very dangerous things, and can lead well- intentioned business people astray. A simple example that I have seen repeatedly is the assumption that a new company can make a lot of money by entering a very large and mature market, if they can just eke out a tiny market share. It’s so tempting – surely we can get at least 0.5% market share, and with a $100 billion market, that’s $500 million in sales for us. Yes, there are large start-up costs, but once we break in, our profit can be $50 million annually in five years! This siren song is always accompanied by detailed financial projections, under baseline assumptions and stress tests. Ostensibly, this is good risk management practice, as the assumptions are explicit. But all too often I’ve seen these assumptions insufficiently justified, the stress tests not broad or severe enough, and the risks inadequately addressed.


This is where the actuary – the quantitatively astute skeptic and businessperson – can be invaluable. The actuary recognizes that market share is a function of how you distinguish yourself relative to competitors, and this is amenable to quantitative and qualitative analysis. The actuary needs evidence for assumptions, and can trace them back to specific operational actions or broader business conditions. The actuary recognizes that numerical assumptions should only be considered as placeholders for a range of possible outcomes, not an exact prediction; deviations can be multiples of the original assumption, not just plus or minus 20%. The actuary recognizes that these deviations represent risks to the business and should be managed attentively, not hoped away. And here’s the best part: the actuary is equipped to help manage these risks, sometimes through operational actions, sometimes through investment transactions, and sometimes through insurance transactions. Common sense meets modern risk management – now that is a powerful combination.

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?