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What influences VA policy owners?

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The presence of living benefits in variable annuities influences policy owner’s behavior with the contracts. Earlier this year, Ruark Consulting in Simsbury, Connecticut conducted its Variable Annuity Industry Experience Study. The full study results are proprietary but Peter Gourley, vice president at Ruark, shared the key results and elaborated on their meaning.

Low aggregate surrender rates:

“The material decline in industry surrender rates during the onset of the economic recession has evolved into flatter surrender rates over the past several years.”

Surrender rates declined by more than half their previous levels during the recession, Gourley points out. That made sense, he says, because people were unsure of what to do with their money. Despite the investment markets’ subsequent strong performance, surrender rates have not spiked back up. 

“We attribute that to a change in what’s available on the VA marketplace for guarantees that as companies have gotten a little risk-averse and made their guarantees a little less rich,” Gourley says. “As a result, it’s no longer possible to give up your VA contract in favor of the next best guarantee, that the guarantees are no longer richer than they were in the past. And, so, I think that’s causing people to hold on to their VA contracts to protect those guarantees a bit more.”

Sensitivity to moneyness and guarantee type:

“The ‘in-the-money’ effect, as owners have higher persistency when they perceive more value in annuity guarantees, is still strongly in effect. Also, surrender values are much lower for contracts with a living benefit, particularly GMIB (guaranteed minimum income benefit) and GLWB (guaranteed lifetime withdrawal benefit).”

“There’s what the actuaries would call a dynamic effect that is surrender rates go down as the value of the guarantee goes up,” says Gourley. “And, we notice that effect is still present, is relatively unchanged, despite the financial crisis and so forth.”

Low partial withdrawal utilization:

“Partial withdrawal frequency increases with age, as expected for GLWB products positioned to provide retirement income. Partial withdrawal utilization continues to be less than fully efficient.”

Low GMIB exercise rates:

“Overall GMIB exercise for the 10-year wait rider is in the low single digits, with higher rates for older ages, in-the-money contracts, and in the first year of eligibility. Contracts that provide dollar-for-dollar withdrawal reductions have much lower exercise rates than those that reduce the benefit in a pro-rata fashion.”

“We’re still seeing the same historical reluctance for people to give up control of their money and turn it into a fixed annuity,” Gourley notes. “Perhaps it’s not a surprise from that standpoint, but yet if you think about the value of these guarantees, I think we would probably still say that the rates of annuitization are perhaps a little bit less than people might have expected.”

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