Living benefit riders boost persistency


Living benefit riders boost persistency

SIMSBURY, CT, March 5, 2018 – Ruark Consulting, LLC today released the results of its 2018 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 3.3 million policyholders spanning the period January, 2007 through September, 2017. A record 16 fixed indexed annuity writers participated, comprising $215 billion in account value as of September, 2017.

“Getting actuarial assumptions right can mean the difference between profitability and anti-selection, or between overhedging and underhedging,” said Timothy Paris, Ruark’s CEO. “Ruark’s studies use industry data to provide greater insight, and more predictable and stable results, than companies can achieve when they limit themselves to their own experience.”

Ruark’s FIA studies cover products both with and without a guaranteed living income benefit (GLIB). GLIB exposure outside the surrender charge period increased 82% in this edition over 2017.

Study highlights include:

  • Overall industry surrender rates have exhibited a secular downward trend since 2007. Surrenders at the shock duration (the year following the end of the contractually defined surrender charge period) have fallen from over 50% in 2007 to 15-25% in recent quarters, and surrender rates during the surrender charge period have fallen from high single digits to below 3%. We note an industrywide dip in surrenders in 2016 and rebound in 2017; 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 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 15%, as compared to 26% for contracts without GLIB.
  • Credited rates have a discernable effect on surrenders. As in past studies, we note that contracts earning less than 2% exhibit sharply higher surrenders than those earning more. Additional experience in this study reveals differentiation among contracts with higher returns, as well.
  • The in-the-money effect, by which owners have higher persistency when the account value is below the guarantee base, is subtle in the case of FIAs. We find that using an actuarial moneyness basis, which discounts guaranteed income for interest and mortality rates, has much greater predictive power than a nominal measure.
  • GLIB benefit commencement rates are low: 7% overall in the first contract duration and then falling to the 2% range in years 3-10. Notably, although experience is limited, exercise rates spike in year 11, suggesting that benefit bonuses may be effective at delaying exercise. When a living benefit contract does begin taking withdrawals, it is likely to continue in subsequent years; average continuation rates are near 100%. However, utilization of the benefit is far from fully efficient. A significant proportion withdraw income in excess of the contractual guarantee, which degrades value of the guarantee in future years.
  • Commencement rates vary considerably by age and by contract size. They are also influenced by the in-the-money effect. Exercise rates increase sharply when contracts move deep in the money, as policyholders recognize the economic value of the income guarantee.
  • 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 subtlely 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. 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 jump 8 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.
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