A recent study by Ruark Consulting LLC indicates that during the recent recession, variable annuity policyholders kept their policies in force rather than surrender them.
According to Richard Tucker (below right), vice president at Simsbury, Conn.-based Ruark, annual “shock lapse” rates (surrender rates that occur after the surrender charge period of a policy expires) ranged from 25 percent and 30 percent in the years leading up the recession (2007 to early 2008). When the economy tumbled in late 2008 and early 2009, those shock lapse rates dropped to between 10 percent and 15 percent. “That is fairly significant to go from shock lapse rates of 25 percent to 30 percent to 10 percent to 15 percent,” Tucker says.
Ruark culled the data from 12 major insurance companies that contributed more than 22 million policy years of experience spanning January 2007 through March 2011. Although the study does not delve into consumer behavior, Tucker says that in conversations with carriers, one reason for the decline in surrender rates may be the persistent low interest rate environment that renders alternative investments, such as bank CDs, fixed annuities and fixed-income mutual funds, less attractive. Therefore, VA policyholders would rather hold onto the policy than surrender and move into an investment that promises returns no better than what they currently have. Investors are also leery of equity based mutual funds because they are reluctant to ride a volatile stock market, Tucker notes.
Another factor is that due to the de-risking strategies carriers have undertaken in recent years, the newer crop of VAs are less benefit rich than those purchased in previous years. “Policies that someone owns right now is likely to have more attractive features in it than if they went and looked at a new VA,” Tucker says. “That’s a reason the consumer will maintain what they have.”
The Ruark study also looked at withdrawal patterns under the guaranteed living withdrawal benefit (GLWB) feature. What it found was a “moderate level” of partial withdrawals once the policy permits an owner to take the benefit.
Tucker points out that GLWBs are a relatively new feature. However, it’s important for insurance carriers to gauge the pattern of GLWB usage for reserving purposes, stresses.
“Some people in the industry may have expected a high utilization of these benefits once they were put on policies,” Tucker says. “The data so far is not showing that. It’s showing that there is moderate usage. That doesn’t mean that ultimately there won’t be greater usage, but it looks like the consumers who have bought these benefits have bought them with a retirement plan in mind. Maybe they buy it when they are in their 50s, and they say this is a retirement income product. And just because they bought the benefit doesn’t mean that they are going to start using it right away if that doesn’t fit into their personal retirement plans.”
Tucker says this is the first time Ruark has tracked surrender rates during a recessionary period. Later this year, the firm will revise the study, adding another year’s worth of data, he adds.