Ruark releases 2019 Fixed Indexed Annuity study

Surrender rates climbing steadily

Ruark Consulting, LLC today released the results of its 2019 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 3.5 million policyholders spanning the period January, 2007 through September, 2018. A total of 15 FIA writers participated, comprising $240 billion in account value as of September, 2018.

“By aggregating across the industry, our studies offer even our largest clients a way to achieve greater precision than they could by relying only on their own data,” said Timothy Paris, Ruark’s CEO. “And as industry experience develops, the underlying trends are becoming even clearer.”

Ruark’s FIA studies cover products both with and without a guaranteed lifetime income benefit (GLIB). GLIB exposure outside the surrender charge period increased 34% in this edition over 2018.

Study highlights include:

  • After a slow decline from mid-2010 through 2016, surrender rates have climbed in 2017-18. Shock duration surrender rates in the most recent quarter were 30%, a level last seen in 2009. Rates following the end of the surrender charge period have risen as well. The increase in surrenders correlates with market interest rate increases. In contrast to variable annuities, which exhibited a dip in 2015-16 corresponding to uncertainty surrounding the DOL’s “fiduciary rule”, the effect on FIA surrenders appears to have been more muted.
  • 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 13%, as compared to 26% for contracts without GLIB.
  • Credited rates have a discernable effect on surrenders. We observe that contracts earning less than 2% exhibit sharply higher surrenders than those earning more. There is also differentiation among contracts with higher returns, although it is less pronounced after normalizing for living presence and utilization. As market interest rates increase, so do surrenders, and there is some indication that a higher credited rate tempers the increase. In contrast, equity returns are negatively correlated with surrenders. Taken together, these results suggest that policyholders consider their FIA contract’s performance in the context of fixed income investments rather than equity market investments.
  • The persistency of contracts with a GLIB rider appears insensitive to nominal moneyness, that is, the relationship of account value to the benefit base. However, when calculation of the guarantee’s relative value is performed by using an actuarial moneyness basis which discounts guaranteed income for interest and mortality rates, the picture changes. Using an actuarial measure, we see that (a) GLIB benefits are not generally as valuable to the policyholder as they might first appear; and (b) persistency is greater when the actuarial benefits are more valuable, as should be expected.
  • Annual GLIB benefit commencement rates are low, 7% overall in the first contract duration and then falling to the 2-3% range in years 3 and later. In contrast to variable annuities, which exhibit a spike following the expiration of benefit bonuses, FIA utilization remains consistent in later years. Benefit commencement rates appear largely insensitive to RMDs. Age, tax status, and contract size all influence commencement rates. When a living benefit contract does begin taking withdrawals, it is likely to continue in subsequent years; average continuation rates are 95%.
  • GLIB utilization increases when policies are in the money, that is, the benefit base exceeds the account value. After normalizing for age, tax, and contract duration, contracts that are 25% in the money or more exercise at a 10% rate. In contrast, when contracts with lifetime withdrawal benefits are out of the money, at the money, or modestly in the money, policyholders exercise at a base rate of about 2%.
  • 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 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 and the presence of a waiting period for free partial withdrawals. 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 for contracts without GLIB jump 9 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.