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Fixed Indexed Annuity Holders Keep Holding On

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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, 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 forceand bond yields remain low forevercould 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.