[March 06, 2018] |
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Ruark Consulting Releases Fixed Indexed Annuity Study Results
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 variable
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:
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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.
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The presence of a living benefit rider has a notable effect on
surrender rates; contracts with a 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.
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Credited rates have a discernale 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.
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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.
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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.
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GLIB 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.
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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-free amount applies.
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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.
Ruark Consulting, LLC (www.ruark.co),
based in Simsbury, CT, is an actuarial consulting firm specializing in
principles-based insurance data analytics and risk management. Since
2007, Ruark's industry- and company-level experience studies of the
variable annuity and fixed indexed annuity markets have served as the
industry benchmarks. Its behavioral analytics engagements range from
discrete consulting projects to full-service outsourcing relationships.
As a reinsurance broker, Ruark has placed and continues to administer
dozens of bespoke treaties totaling over $1.5 billion of reinsurance
premium and $30 billion of account value, and also offers reinsurance
audit and administration services.
Ruark's consultants are frequent speakers at industry events on the
topics of longevity, policyholder behavior, product guarantees, and
reinsurance. Their work and commentary have appeared in numerous
industry publications. Ruark Consulting enjoys an ongoing collaboration
with the Goldenson Center for Actuarial Research at the University of
Connecticut, and is a member of the Bermuda International Long Term
Insurers and Reinsurers Association.
View source version on businesswire.com: http://www.businesswire.com/news/home/20180306006601/en/
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