The evolution of guaranteed living benefit features in variable annuities is continuing to unfold, in terms of their impact on sales, overall purchase (“election”) rates, and utilization rates.
Three GLB types are generally offered in the VA marketplace: guaranteed minimum income benefits (GMIB), guaranteed minimum accumulation benefits (GMAB), and guaranteed minimum withdrawal benefits/guaranteed lifetime withdrawal benefits (GMWB/GLWB).
The vast majority of VA sales (93%) involve products offering GLBs, according to Milliman Inc.’s third annual survey on VA GLB market dynamics. (The survey of 19 VA insurers–most of them top sellers–includes VAs offering at least one type of GLB during 2006 and the first half of 2007; their average responses appear here.)
The 93% average increased to 95% during the first half of 2007. In fact, a small percentage of VA sales (less than 0.5%) offer a GLB that is automatically included in the product design.
A more recent trend is that nearly 20% of VA sales involve an offer of a “hybrid” GLB. A hybrid GLB refers to multiple GLBs packaged together, such as a GMAB/GMIB, or GMAB/GMWB. (Chart 1 shows sales by GLB type.)
When VA sales involve an offer of a GLB, nearly 73% elect at least one benefit. That figure was nearly 74% for the first 6 months of 2007. (See Table 1.)
Election rates of optional GLBs vary by company, ranging from 24.7% to 93.8% during 2006 and from 25.7% to 94.4% during the first half of 2007.
Sales of VAs with the GMWB/GLWB feature continue to outpace VA sales with other GLBs. This trend is clearly being driven by the growing dominance of the GLWB. For calendar year 2006, standard GMWBs were elected on 21.8% of total VA sales, dropping to 12.1% during the first half of 2007. Conversely, GLWB election rates were 27.6% of total VA sales during 2006, increasing to 40.3% during the first half of 2007. Some of this is obviously driven by carriers that discontinued offering the standard GMWB option after the GLWB option was introduced.
Exercise rates–or use–of the GMWB/GLWB feature have continued to grow. On average, during calendar year 2006, 17.2% of in-force VA account value having GMWB/GLWBs exercised the feature. (That is, partial withdrawals were taken). For GMWB/GLWBs that have been exercised, nearly 84% of the withdrawal allowance was used during calendar year 2006. To illustrate, if 4% of the 5% annual withdrawal allowance is taken, then 80% (4%/5%) of the allowance was used.
The strong showing of GLWB benefits should not be construed as meaning they are taking over the entire market. A strong core of carriers and producers (in particular, financial advisors employed by wirehouses and other large broker-dealers) remain committed to the GMIB feature. Also, the survey participants include some of the top players that are committed to the GMIB market. (Election rates for optional GMIBs were reported by participants as 31.4% and 30.2% for calendar year 2006 and for the first half of 2007, respectively.)
Regarding utilization rates on GMIBs, 5 survey participants with GMIB policies past the contractual waiting period reported that 0% of GMIBs past the waiting period were exercised in calendar year 2006; 5 also reported that 0% were exercised during the first 6 months of 2007. The others reported very low utilization rates (i.e., 3% or below), except one which reported 22.6% in the first half of 2007. These responses are clearly shaped by the “in-the-moneyness” of the VAs at a given time. However, the findings appear to support what the industry has suspected–that utilization rates on GMIBs are low.
As for GLB election rates by distribution channel, overall rates are consistent with the ranges reported above. However, a distinctly different channel profile emerges for GMIBs versus GLWBs. Companies reporting GMIB sales gave distribution channel detail only for wirehouses, large broker-dealers, captive agents and banks. GMWB/GLWB purchase rates were reported for all channels (including independent B-Ds, independent producers, and direct distribution).
A final measure showing the tide turning toward GLWBs shows up in the average initial premium for VAs from customers who purchase a GMWB/GLWB. This average is growing. Based on survey results, VA customers who purchase GLBs pay relatively higher premiums than those who do not purchase GLBs. However, the effect is most pronounced for sales involving GMWB/GLWBs. (See Table 2.)
The GLB arena has been a hotbed of VA product development activity over the past decade, and no doubt will continue to be so for many years to come. For the moment however, the success of the GLWB is very clearly coming to the surface.
Susan Sell, FSA, MAAA, is a consulting actuary, and Brent Hamann is a senior consultant, with Milliman Inc., both in the Chicago office. Their respective e-mail addresses are firstname.lastname@example.org and email@example.com.