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Uptick in Product Surrenders Has Treasury Team on Alert

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What You Need to Know

  • The Federal Insurance Office is supposed to help the federal government track insurance.
  • In its new annual report, the FIO does not talk much about derivatives or RILAs.
  • The office does talk about surrenders.

The Federal Insurance Office is worrying about product surrenders at life, health and annuity issuers.

The FIO, an arm of the U.S. Treasury Department, talks about a big increase in surrenders at the companies in its latest annual report.

Surrenders increased 12% between 2020 and 2021, to $363 billion, and surrenders amounted to 52% of the insurers’ 2021 net premium revenue, FIO officials write.

“Year-over-year growth in surrenders has been averaging 4.6%, while the annual growth rate for net premium receipts has been averaging 0.9% over the same 10-year period,” officials note.

What It Means

Life and health insurers have been doing well, overall, and the companies’ cash and invested assets increased 5% in 2021, officials say.

But the FIO adds that the increase in surrenders could be a sign that policyholders might be taking cash out of relatively low-return products because they believe that inflation is increasing, interest rates will be rising, and they’ll do better investing money elsewhere.

If that analysis is correct, that could be a sign that rating analysts’ predictions could be coming true, and rising rates are leading to some “disintermediation,” or customers’ moves to pull cash away from insurers.

For you and your clients, those moves could be a sign that you’re staying awake and doing a good job reallocating the clients’ assets in response to changing conditions.

For insurers, disintermediation could sit in their asset totals like a tapeworm.

The Background

Congress created the FIO, in a section of the Dodd-Frank Act in 2010.

Drafters were hoping the FIO would help the Treasury Department and other federal agencies understand the insurance market better and warn federal financial services regulators about any problems that might be brewing.

Last year, the FIO noted that life and health insurer surrenders had decreased for two years in a row.

In the 2021 report, the FIO suggested that one concern is that the derivatives used to power registered index-linked annuities could increase how connected life insurers are to other firms in the financial sector.

This year, officials did not mention RILAs, and the mentioned the derivatives used in life and annuity investment hedging only in passing.

Surrender Details

The FIO found that surrenders for fixed deferred annuities and indexed annuities rose 13% in 2021. Surrenders increased 17% for variable annuities without benefits guarantees, and 23% for variable annuities with guarantees.

In addition to expectations about interest rates, another force driving surrenders higher could be dealmaking, officials say.

“Surrender activity may reflect the effects of reinsurance transactions, recaptures and strategic decisions relative to in-force blocks of business,” officials say.

(Image: solvod/Adobe Stock)


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