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.
What Your Peers Are Reading
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.”