Finally, some good news for annuity risk managers: A recent study by Ruark Consulting, LLC disclosed that annuitization rates on variable annuities with guaranteed minimum income benefit (GMIB) riders were lower than the industry would have estimated.
Between January 2007 and June 2012, annuitization rates on variable annuities (VAs) with GMIBs were less than 5 percent annually. This was the first time actuarial consulting firm Ruark compiled a study on GMIB annuitizations because only until recently have these policies been in force long enough to allow for annuitizations, explains Ruark vice president Richard Tucker.
“These policies were written early in the 2000s and most of the benefits had a 10-year waiting period, meaning the policyholders could not elect annuitization until 10 years had passed,” Tucker says. “Until we got enough data beyond that 10-year period, there wasn’t enough industry experience to conduct the study.”
Ruark based the study on data from seven insurance companies that contributed 600,000 contract years of exposure and 10,000 annuitizations.
Unlike guaranteed lifetime withdrawal benefits (GLWBs), which allow periodic withdrawals from the account value, policies with GMIBs must be annuitized before the income flow commences.
More conservative estimates
Without historical research to guide them, insurance risk manager’s only option is to make “educated opinions,” Tucker relates. Therefore, they would tend to be more conservation in their assumptions.
Says Tucker: “In general, those educated opinions would have been higher than what these initial results show.”
How much higher is hard to say since this was the first time a study of this kind of was done. However, Tucker does venture that industry expectations for “high in the moneyness” contracts would be in the ballpark of 11 percent to 13 percent.
The study did find that VA GMIB annuitization rates did vary by the age of the annuitant, peaking in the prime retirement ages of 65 to 69. The rates also spiked when the value of the guarantee was greater than the account value, which is commonly referred to as “in the moneyness.”
Another assumption that didn’t quite pan out was an anticipated increase in annuitization election after the waiting period ended. That did occur, but at a “muted” level, according to the Ruark study. Tucker declines, however, to give any specific number on that rate.
Though these initial results are encouraging to annuity risk managers, Tucker cautions that these GMIB VA contracts are still fairly new. “It’s not yet clear what the evolving experience will be,” he says. “These are lifetime policies and we are now looking at the annuitization experience from just the first couple of years that data is available. So it’s a good initial indication from a risk management perspective, but it’s not the full story yet.”
FIA study in the works
Currently, Ruark is researching its first overview of partial withdrawals from fixed indexed annuities.
With more FIAs taking a page from the variable annuity handbook and featuring living benefits, enough data is now available to do such a study, Tucker says. There are capital implications for carriers as well, since indexed annuities may fall under a similar principles-based reserving formula as variable annuities. “There has already been a modeling need on the variable annuity side,” Tucker says. “The indexed annuities are moving into that same world.”