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.