Fixed Indexed Annuity Holders Keep Holding On
January 24, 2012 by Maria Wood
Between 2006 and 2010, full surrender rates dropped by 40 percent.
By Maria Wood
January 23, 2012
Photo credit: jscreationzs: http://www.freedigitalphotos.net/images/view_photog.php?photogid=1152
A recent study revealed that holders of fixed indexed annuity (FIA) contracts
want to keep those policies in force rather than surrender them.
In a first-ever report on the subject, Ruark Consulting, LLC of Simsbury, Conn.,
reviewed data on FIA full surrenders supplied by nine insurance companies
between January 2006 and December 2010. Those participating companies
represented more than 80 percent of 2010 FIA sales and contributed 7.7 million
policy years of experience data.
Among the factors analyzed were: policy duration; age, existence of living benefit;
in-the-money living benefit; policy size; historical credited rate; calendar
quarter; qualified versus non-qualified status; type and level of bonus; market
value adjustment; and distribution channel.
What the researchers found was that full surrender rates at the end of the time
period studied were 60 percent of those at the beginning, according to Richard
Tucker, vice president of Ruark, indicating that surrender rates dropped by 40
percent.
Since the report’s purpose was simply to quantify the data rather than discern what
was behind consumer behavior, Tucker says he cannot be certain why
policyholders decided to keep their FIAs in force rather than surrender for
cash or convert into another product.
However, he ventures that one reason for the decline in surrenders is that alternative
investment options looked less appealing to FIA owners.
“Interest rates have come down, rates on bank CDs have come down, and the equity markets
have experienced high volatility,” Tucker says. “So if you look at the options
available to consumers, those options became less attractive over the time
period of the study.”
Another reason could be that suitability requirements for the sale of annuities have
become stricter during the period the study covered. Consequently, moving into
another financial product is more difficult, Tucker says.
Annuity expert Jack Marrion, president of Advantage
Compendium, a St. Louis-based research and consulting firm and a frequent
contributor to LifeHealthPro.com, does study
consumer behavior in regards to annuities and supports Tucker’s
contention that less competitive investment alternatives and tighter
suitability standards are probably the cause of the drop in FIA surrenders. He
adds another reason: guaranteed lifetime withdrawal benefits, or GLWBs.
“GLWBs made annuities stickier because the growth in the ‘income benefit account’ has
far exceeded actual cash value account growth.” Marrion writes in email
comments. “For example, an 8 percent roll-up rate creates $125,971 in three
years but actual accumulated value might only be $106,000. It would difficult
to bonus-up with a new annuity to offset this difference. In addition, since
the new NAIC suitability rules came out carriers have been much tighter on what
they consider an acceptable 1035 exchange and are turning down more transfer
business.”
Three years ago, Marrion says he believed
1035 exchange deals would fall off and therefore producers and IMOs would need
to change their business model.
“What I didn’t see was that GLWB payout
factors and roll-up rates would be lower, and that that old 8 percent roll-up
rate might also have had a 6 percent payout factor at age 65, and the new one
has a 7 percent rate and a 5 percent factor,” he writes. “I also didn’t see CD
rates dropping nearly as much as they have. There are existing annuities out
there with minimum guarantees that are double or triple current CD rates.”
Although the report didn’t ascertain the
reasons behind policyholders’ actions, Tucker says insurance companies can
nevertheless use the statistics in making future decisions on product pricing,
reserve levels and risk management strategies.
Marrion asserts for most carriers, a drop
in FIA surrenders will not have a meaningful impact on their business. “The
effect on carriers if the contracts continue to stay in force‑and bond yields
remain low forever‑could be losses on this business block due to the higher
guarantees,” Marrion writes. “However, for most of the carriers this is not
going to be a problem, even if GLWB utilization is high, because it is only a
part of their overall business and they have lowered the guarantees on current
products to be sustainable in a low-rate environment.”
Marrion further points out that although
bond rates have been dropping, the “odds are against a 1946-1964 scenario
continuing because carriers have more financial alternatives to support
yields.”
Ruark has done previous studies on
surrender rates for variable annuities and found a similar trend during the
same time period, Tucker says.
Tucker declined to release specific details
from the study, saying the information is to be shared only with participating
insurance companies. However, other findings from the FIA study include:
- Policies with guaranteed living benefits registered lower surrender
rates than those without. - Contracts with low credited rates experienced higher rates of surrender.
- When Treasury interest rates dropped in 2008 and 2009, there was
temporary spike in surrender rates for contracts with positive market
value adjustments. - Surrender rates varied by attained age, policy size, qualified tax
status, distribution channel and bonus feature.
