Ruark Releases 2021 Fixed Indexed Annuity Study Results

Provides first look at the effects of COVID-19 on policyholder behavior

Ruark Consulting, LLC today released the results of its 2021 industry studies of fixed indexed annuity (FIA) policyholder behavior, which include surrenders, income utilization and partial withdrawals. Ruark’s FIA studies cover products both with and without a guaranteed lifetime income benefit (GLIB).

“This study gave us our first look at the effects of COVID-19 on FIA policyholder behavior,” said Timothy Paris, Ruark’s CEO. “Given record low interest rates, and disruptions to sales channels, there was no way to know whether past patterns would continue. We’re intrigued by how some relationships changed -- and others didn’t.”

The study data comprised nearly 4 million policyholders from 16 participating companies spanning the 13-year period from 2007-2020, with $264 billion in account value as of the end of the period. GLIB exposure constituted 43% of exposure overall, and 47% of exposure in the last 12 study months. GLIB exposure beyond the end of the surrender charge period increased 83% over 2020 study exposure.

Highlights include:

  • Extreme market activity, and COVID-related disruption to policyholders’ usual communication patterns with advisors and agents, had mixed effects on 2020 surrender activity. Record low interest rates led to more positive market value adjustment, and contracts in the surrender charge period with a positive MVA surrendered at higher rates. For contracts beyond the shock duration, surrender rates declined, consistent with an industry-wide decline in gross annuity sales in 2020; a proportion of gross sales is attributable to exchanges of one annuity product for another.

  • Contracts with a guaranteed lifetime income benefit have much better persistency than those without, and among contracts that have begun taking income withdrawals, surrender rates are even lower. Persistency appears insensitive to nominal moneyness (the relationship of account value to the benefit base), but when an actuarial moneyness basis which discounts guaranteed income for interest and mortality rates is applied, we see that persistency is greater when the economic value is higher, as should be expected.

  • The relationship between surrender charges and surrender rates can be quantified. The study examines the relationship of persistency to the effective surrender charge, that is, the difference between account value and cash surrender value (including bonus recapture).
  • Surrenders are sensitive to external market forces as well as the absolute level of credited interest rates. Contracts earning less than 2% exhibit sharply higher surrenders than those earning more. As competitive market interest rates increase, so do surrenders, though there is some indication that a higher credited rate tempers the increase. Equity returns are negatively correlated with surrenders, but only for contracts without an income benefit.

  • Where cash surrender values are subject to market value adjustment, surrender rates for policies with a positive market value adjustment exceed those for policies with a negative adjustment. In the aggregate, policyholders act as though a positive MVA is a bonus, rather than a mechanism to make both parties whole, while surrender rates for contracts with negative MVA are similar to those for contracts with no MVA feature. Among contracts with a positive MVA, surrender rates are inversely related to equity market performance; we surmise that policyholders who are disappointed in credited returns on their FIA take advantage of the temporary offset provided by a positive MVA, and surrender at higher rates.
  • Lifetime income commencement rates are low, 7% overall in the first year following the end of the waiting period and then falling to approximately 3%in years 3 and later. There is evidence of a spike in utilization after year 10, particularly where the benefit is structured as an optional rider rather an embedded product feature. Age, tax status, and contract size all influence commencement rates.
  • We see little observable effect on GLIB utilization from COVID-19 disruptions to sales channels and capital markets, given initial 2020 indications.
  • Lifetime income utilization increases sharply when policies are in the money, that is, the benefit base exceeds the account value. After normalizing for age, tax status, and contract duration, contracts that are 25% in the money or more exercise at a 12% 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%. Income commencement rates are most sensitive to moneyness following the end of the rollup period.

  • FIA contracts typically offer the opportunity to take 5-10% 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 GLIB, though free partial withdrawal frequencies and amounts are somewhat lower on contracts with a lifetime income guarantee. Free partial withdrawal activity is influenced by age and required minimum distributions, as well as contract size and the presence of a waiting period.

  • 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 by 10% of account value in the year immediately following the end of the surrender charge period.

Detailed study results, including company-level analytics, benchmarking, and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.

Ruark Releases 2020 Variable Annuity Study Results

Indications that COVID-related market activity and disruptions affected policyholder behavior

Ruark Consulting, LLC today released the results of its 2020 industry studies of variable annuity (VA) policyholder behavior, which include surrenders, income utilization and partial withdrawals, and annuitizations.

“We expected that 2020 behavior would be different,” said Timothy Paris, Ruark’s CEO. “By looking at industry-level data, we are better able to identify and quantify those differences – especially on current-generation products.”

Ruark’s 2020 study spanned the period from January 2008 through June 2020. The study period was designed to capture early effects of COVID-19 and related market movements. COVID-related findings include:

  • Extreme market activity in the first half of 2020, and disruption to policyholders’ usual communication patterns with advisors and agents by COVID-related social distancing, appear to have affected VA surrender and income commencement behavior
  • Contracts with guaranteed lifetime withdrawal benefits (GLWB) persisted at greater rates than expected, as current-generation products exhibited greater sensitivity to 2020 market movements than they did in the past
  • Surrender rates fell uniformly on older product types in 2020; this is suggestive of a new, unique surrender regime, distinct from the regimes observed before and after the 2008 financial crisis
  • GLWB commencement rates were depressed in 2020 among contracts with the highest propensity to exercise the benefit: in-the-money contracts following the end of the deferral bonus period. Both the level and sensitivity of commencement rates were reduced.

Study data comprised 89 million years of exposure and 13.9 million policyholders from 20 participating companies, with $675 billion in account value as of the end of the study period. The study’s in-the-money exposures on GLWB contracts were 23% higher than in Ruark’s 2019 study (and 40% higher for deep in-the-money contracts). Among contracts issued since 2011, deep in-the-money exposure increased to 9% of total exposure, up from 6% in 2019. The study contained over 740,000 exposure years prior to withdrawal commencement for contract durations 11 and beyond, more than doubling the comparable exposure in Ruark’s 2019 study.

Other study highlights include:

  • GLWB deferral incentives appear to be effective. Income commencement rates are low overall; about 13% in the first year and falling to about half of that in years 2-10. However, commencement rates more than double in year 11 with the expiration of common 10-year bonuses for deferring income, before falling to an ultimate rate. After commencement, GLWB continuation rates are over 85%.
  • Income commencement rates increase when GLWBs are more in-the-money, that is, the benefit base exceeds the account value. This effect is quite pronounced after the expiration of common 10-year deferral incentives, with commencement rates ranging from low single digits to nearly 30% depending on moneyness.

  • Annual withdrawal frequency rates for GLWB and GMIB have continued to increase and have become more efficient with approximately 65% of recent experience at the full guaranteed income amount.
  • Free partial withdrawal amounts increase after the end of the surrender charge period, similar to the familiar “shock” in surrender rates. Excess withdrawal amounts on GLWB and GMIB increase as well.
  • Contracts with GLWB and GMIB have much lower surrender rates, and this effect is even more pronounced for those limiting their partial withdrawals to the guaranteed income amount.

  • Policyholders that take systematic withdrawals on GLWB and GMIB exhibit a select-and-ultimate effect, with very low surrenders in the first systematic withdrawal year and increasing thereafter. In the fourth systematic withdrawal year and beyond, surrender rates are comparable to those of contracts that have not taken any withdrawals.
  • When calculating relative value for GLWBs, use of a “nominal” moneyness basis (account value relative to the GLWB benefit base) can be deceiving, since it fails to reflect important aspects of the product’s economics. Therefore, it may be preferable in many cases to use an actuarial basis that incorporates interest and mortality rates. Surrenders exhibit a dynamic relationship to moneyness, whether measured on a nominal or actuarial basis. On a nominal basis 80% of GLWB exposure is in-the-money, whereas on an actuarial basis only 12% is in-the-money.

  • Surrender rates vary little across distribution channels, once other drivers of surrender behavior are accounted for. The exception is where companies cannot ascertain whether a policyholder has an ongoing relationship; where the distributor-policyholder relationship is weak, surrenders are as much as 50% higher.

  • Annuitization rates for GMIBs are in the low single digits and continue to decline. “Hybrid” versions that allow partial dollar-for-dollar withdrawals have much lower rates than traditional versions which reduce the guarantee in a pro-rata fashion, especially in the first year of eligibility. Factors influencing annuitization rates include age, duration, last year of eligibility, death benefit type, contract size, and moneyness.

Detailed study results, including company-level analytics, benchmarking, and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.