Variable annuity sales reached a new record in 2007 and the ongoing appeal of guaranteed living benefits (GLBs) played a key role in their success.
In 2007, for new contracts offering at least one GLB, a GLB was elected in 77% of sales premium, according to a study by LIMRA International, which has tracked the rate at which GLBs are elected since the beginning in the first quarter, 2006.
In 2007, the overall election rate rose slightly during the year, from 75% in the first quarter to 79% in the fourth quarter.
Industry deferred VA sales reached $183.9 billion in 2007. This figure includes all subsequent payments into existing VA contracts, most often associated with employer-sponsored plans. If subsequent payment sales premium is excluded, the new deferred VA sales for 2007 would be an estimated $141.3 billion.
GLBs come in a wide variety:
–Guaranteed lifetime withdrawal benefits (GLWBs)
–Guaranteed minimum withdrawal benefits (GMWBs)
–Guaranteed minimum income benefits (GMIBs)
–Guaranteed minimum accumulation benefits (GMABs)
–Hybrid GLBs (in which more than one GLB is combined in a single-fee structure).
GLBs are increasingly common in VA sales. More companies are rolling out products with GLB features, and companies with GLB riders are making enhancements to existing riders and offer them on a larger portion of their existing suite of products.
During 2007, about 91% of new VA sales–or $128.4 billion–were of contracts in which a GLB was available. By applying the 77% election rate from the study to the estimated $128.4 billion in which a GLB was available industry wide, the determination can be made that $98.8 billion in sales premium was associated with elected GLBs riders, representing over half of all VA sales during the period.
Election rates are based on sales in which the GLB is elected compared to sales in which the GLB is available at the contract level (see Figure 1). The percentages do not add up to the 77% that elect any GLB because every contract does not offer every type of GLB. These rates are based on a constant group of 20 companies whose total new VA sales, in which a GLB was available, equaled nearly $120 billion, or 93% of the $128.4 billion industry figure.
Not only is the GLWB most likely to be available, it also has the highest rate of election. When examining election rates each quarter during 2007, the trend varied by GLB. Using a constant group of companies, election rates were largely flat for both GMAB and GMIB, while they decreased each quarter for GMWBs. Meanwhile, GLWB election rates increased modestly each quarter in 2007.
Election of GLBs is only the first in a series of behaviors related to the use of these benefits. The contract owner must keep the VA in force until benefit maturity for GMIBs and GMABs, and must actively take withdrawals for GLWBs/GMWBs or annuitize for GMIBs. In addition, many of the GLB benefit bases can be affected by step-up options, guaranteed growth if no withdrawals are taken, additional premiums or withdrawals prior to exercising the benefit at its maturity date.
Knowing more about actual withdrawals from VAs with GMWBs, annuitizations from VAs with GMIBs, and persistency for VAs with GMABs–as well as the intermediate behaviors involving step-ups and cash flow–is extremely helpful to insurers assessing and managing the long-terms risks of these benefits.
In its second-annual study of the utilization of GLBs, LIMRA addressed these issues. The results are based on over 1.6 million contracts that were either sold during, or in force as of, 2006. The discussion below focuses only on GLWB and GMWB utilization. (Note: insufficient information is available in the study on GMAB and GMIB utilization, because a majority of these riders had not reached benefit maturity.)
GLWBs. Among contract owners with GLWBs at the beginning of 2006, 23% took withdrawals during the year. The median amount withdrawn was 5% of beginning-of-year contract value, which coincides with the typical maximum annual withdrawal specified under the terms of the benefit.
It is not always possible to determine whether a partial withdrawal in a single year constitutes “utilization” of the GLWB. Therefore, the study also examined use of systematic withdrawals (a subset of all partial withdrawals) and multiple-year withdrawals. As it turns out, the vast majority of partial withdrawals in 2006 were classified as systematic (see Figure 2). And of those with withdrawal activity in 2005, 89% had withdrawal activity in 2006.
Older owners are much more likely to take withdrawals, especially systematic withdrawals, than younger owners. In part, this activity reflects required minimum distributions (RMDs) from IRAs after age 70 1/2 .
GMWBs. Compared to GLWBs, non-lifetime GMWBs were more likely to be utilized in 2006. This difference could reflect the incentives offered by many GLWBs that provide guaranteed growth if no withdrawals are taken. In addition, some owners may delay the onset of lifetime payouts in order to have a higher annual maximum withdrawal percentage.
Among contract owners with GMWBs at the beginning of 2006, 29% took withdrawals during the year. The median amount withdrawn was 6.5% of beginning-of-year contract value, slightly below the standard 7% maximum annual withdrawal amount.
The leading-edge of boomers is entering their early 60s. GLBs offer these individuals a safety net that enables them to stay in the equity market with its greater long-term returns while guarding against possible market downturns.
This positioning makes sense as people try to maximize their retirement nest egg in an increasingly short time frame, knowing that losses may be impossible to make up. Given this situation, it is a safe bet that GLBs will continue to be a major driver of VA sales in the years to come.
Joseph Montminy, ASA, MAAA, is associate research director-retirement research, and Matthew Drinkwater, Ph.D. is assistant managing director- retirement research, at LIMRA International, Windsor, Conn. Their respective e-mail addresses are firstname.lastname@example.org and email@example.com