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.

Curtain Call

In the six years since the financial crisis, actuaries have played an integral role in steering the variable annuity industry from an abrupt and tragic ending.  Actuaries developed the new simplified and “de-risked” products that have become the norm, refined and expanded hedging programs, and reset product charges commensurate with current capital markets conditions.  They have also helped many companies go so far as to offer buyouts to inforce policyholders, in an effort to mitigate the large and complex risks associated with legacy products.

It all sounds so sensible, positive, and tidy – through the tumult, hard lessons have been learned, most of the players have survived, and actuaries have lead the way to a new normal.  Curtain.

Not so fast.

The potential for a repeat performance of legacy blocks in the next financial crisis will put claims of improved risk management to the test.  The mismatch risk of using the available short-term investment hedges to support decades-long product guarantees is well documented and perhaps part of the scenery at this point.

But since the financial crisis, as the variable annuity market has reconciled itself to a new normal in the capital markets, we have seen the sudden emergence and star turn of a new threat – policyholder behavior.  This includes surrenders, partial withdrawals, annuitizations, and mortality within the context of living benefit and death benefit guarantees.  Previously only a bit player – estimated by pricing actuaries, fine tuned by valuation actuaries, and scripted for the hedging managers – adverse policyholder behavior and subsequent extrapolations to future behavior have been responsible for billions in losses over the last three years.

Surely it cannot end like this.  It is not just the surprise losses due to policyholder behavior, particularly surrenders, but that it begs the question – is there more?  Is this a one time event or a harbinger of worse tidings?  And what is being done about it, beyond the modest level of inforce policyholder buyouts?

Mortality rates continue to fluctuate, making the cost of death benefit guarantees a moving target.  The repeated underestimation of longevity improvements can dramatically increase the cost of living benefit guarantees.  Surrender rates continue to be very low, myriad factors seem to affect wide ranging partial withdrawal behaviors, and the industry is on the front edge of a wave of annuitization eligibility for products guaranteed in those terms.  Incredibly, with all of this, the main strategy for managing policyholder behavior risk seems to be the “hope sandwich” – hope to determine a margin for conservatism in excess of best estimate assumptions, reflect it in product pricing, and then hope it is adequate for decades after launch.


This is exactly where actuaries need to turn their attention, to rewrite this flimsy script and allow the variable annuity market to be repositioned on solid ground for the long run.  One way to do this is through the intelligent use of reinsurance.

In much the same way that the life insurance industry has used reinsurance to actively manage its mortality risk exposure, the variable annuity industry can use reinsurance to actively manage its policyholder behavior risk exposure.

Carving mortality risk out of death benefit guarantees is straightforward, and follows life reinsurance mechanics with a similar potential audience of life reinsurers.  The ceding company pays reinsurance premiums equal to an agreed tabular mortality basis times the amount at risk each period, in exchange for receiving reimbursement for actual death claims.  The economic cost to the ceding company depends on the excess, if any, of the agreed tabular rates over the actual mortality rates for the term of the reinsurance.

Elective policyholder behaviors require a different mindset because the primary concern for direct writers is not short term fluctuations, but sustained and significant adverse deviation relative to expectation.  This triggers revisions to best estimate assumptions, which means dramatic reserve and/or capital increases, as we have seen over the last three years.  So direct writers really need catastrophe reinsurance for these risks – they should be willing to pay a premium in exchange for a much larger reimbursement in the event that an extremely unlikely event occurs.  This “cat” risk profile is familiar to many property and casualty reinsurers, hence they are a natural audience for this type of reinsurance.  Structuring, positioning, and negotiating this type of reinsurance is bespoke work, based on deep analysis of credible company and industry experience data, segmented in shorter reinsurance terms, and isolated from the ceding company’s retained capital markets risks.

The benefit to variable annuity companies is clear – mitigate policyholder behavior risks in order to stabilize their financial profile around asset-based fee income.  The benefit to reinsurers is to profitably grow their speciality risk portfolio into a huge market where their expertise and capacity are sorely needed.  The benefit to the public is continued access to variable annuity products that provide vital benefits for a secure retirement.  The benefit to actuaries is nothing less than the successful realization of our profession’s vision of a sound and sustainable financial security system.

I know that we are up to this challenge, and we will write a worthy end to this final act.  Let’s save the curtain call until then.

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?

Industry Experience Studies

Insurance companies have always performed experience studies, but the needs for these studies have increased dramatically and will continue to do so.  Product designs have become more complicated.  Principle based reserves and required capital require significant knowledge of historical experience in order to establish appropriate assumptions.

Experience studies must satisfy the following criteria to be of maximum value:

  • Reliable data
  • Sufficient volume of data
  • Retain value of business information
  • Detailed breakdowns to see trends
  • Analysis and understanding
  • Availability of internal staff
  • Timeliness

Ruark Consulting has in-depth expertise conducting experience studies for our clients.  Many have been performed on a multi-company basis, while others have been done for specific needs of individual clients.  Topics studied have included mortality as well as policyholder behavior such as persistency and living benefit utilization.  Ruark Consulting addresses the necessary criteria via:

Reliable data – A large portion of our time is spent scrubbing the client’s data.  Our experienced actuaries review this data, often finding issues that the client was unaware of.

Sufficient volume of data – Our multi-company studies pool data from all participating companies.  Confidentiality of each company’s contribution is maintained.  Aggregation of results dramatically reduces the noise that masks trends in any individual company’s results.  Each participating company can compare its own results to those of the aggregate group.

Retain value of business information – The experience data contributed by participating companies has significant business value.  Ruark Consulting’s study results are only available to the participating companies and are not sold to outsiders.

Detailed breakdowns to see trends – Our studies take an in-depth look at many factors that can affect experience, allowing superior cause-and-effect determinations.  This analysis is particularly effective when multiple companies’ data can be combined, resulting in improved statistical significance at finer breakdowns.

Analysis and understanding – The numerical results of our studies are combined with analysis reports that allow management to quickly get to the actionable information.

Availability of internal staff – Internal client company resources have rarely kept pace with the accelerated needs from experience studies.  Ruark Consulting’s studies can provide the critical information needed by company management and free up scarce internal resources for other priorities.

Timeliness – Ruark Consulting’s experience study results are available within several months of the close of the data collection period, while other studies often have lags measured in years.

Ruark Consulting’s experience studies are the timely, cost effective way to improve the quality of the historical information available to your company for modeling and management decision making.  If you would like to learn more about these opportunities, please contact:

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






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 | joel@ruark.co | www.ruark.co

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.