Living benefits riders have been around for a decade now in variable annuities and, more recently, in fixed indexed annuities.
That invites a natural question: What are policyholders doing with those features?
A new study on variable annuity (VA) “policyholder behavior” sheds some light on this. It is a light that annuity professionals may find helpful since the patterns revealed in the study can inform conversations with clients and influence recommendations made to clients.
The money-ness factor
The researchers found that the “money-ness” of living benefit riders is spurring policyholders to keep (rather than surrender) their annuities. The trend started during the last recession in 2008 and has continued to this day.
Money-ness refers to the guaranteed value of living benefit riders when compared to the VA’s actual account value, Peter Gourley said. He is vice president at Ruark Consulting, a Simsbury, Conn. actuarial firm that did the study. Ruark has been following VA policyholder behavior at 18 major VA carriers since 2008.
In general, money-ness goes up when the VA account values decline, he told AnnuityNews. That’s because the values of the guarantees do not fall. Comparatively speaking, they are worth more. And, when considering the rollup provisions and other features that many living benefit riders include, the value of the rider benefits have actually risen since policy issue.
Bottom line: The new study found that all living benefit riders showed a “dynamic effect.” The dynamic is that policy lapses (surrenders) decline when the value of the rider guarantees rise in comparison to the account value.
For example, before the last recession, approximately 30 percent of all VAs would lapse during their “shock lapse period.” (This period is the first year following the end of a VA surrender charge period, which might run five to seven years or so. Policy surrenders typically spike at this period because the policyowner now has access to the funds free of early surrender penalties.)
However, after the 2008 recession hit, VA surrender rates during the shock lapse period fell to around 15 percent, according to Ruark.
The declining account values at the time made it so that living benefit riders developed proportionately greater value for clients, Gourley said, noting that some riders may have risen to two times account value.
He suggested that, when policyholders saw that the value of their riders was now higher, more of them decided to hang onto their contracts during the shock lapse period than previously, Gourley said.
“People became frightened and wanted to hold on to what they had,” he said.
“Another factor is that those who might have otherwise been interested in exchanging out of an older VA for a new one, had less incentive to do so. That’s because the VA carriers had started de-risking their policies, a process that included offering living benefit riders that were less rich that previous version.”
That meant that the incentive to move into a richer VA contract was gone. The combined impact was to keep the lapse rate down.
How advisors help
Probably, many policyholders did not reach their decision not to lapse on their own, Gourley said. It is likely that their advisors helped them see the value of the riders in view of current conditions. “Otherwise, they may not have even been aware.”
Ruark studies found that some policyholders did let their policies lapse during that period, even when they were in the money.
“Some policyholders really needed the money at the time of lapse,” Gourley said. “But others probably no longer had an engaged advisor who could help them make an informed decision.”
In general, the study’s findings support the interpretation that “an active advisor who regularly engages with a VA client will result in the client being more aware of the value of their riders and other policy features” than advisors who do not engage, he said.
“If an advisor has left the business or is not involved, it is hard to know what the client will do with an existing VA or how the person will respond to a new advisor who wants to replace the old product with a new one.”
A surprise in the data
Since the stock market has been up for the past two years, and has even reached new highs, one might suppose that VA surrender rates during the shock lapse period are now climbing back up. After all, VA account values in many, if not most, contracts have rebounded substantially from their recession lows.
However, Ruark found that the surrender rates during the shock lapse period have increased only slightly — by about 0.5 percent — from last year. This is nowhere near pre-recession levels.
Gourley believes that the de-risked policies that came out in the post-recession era may be a key factor in this. VA carriers still have not returned to offering the rich designs of the pre-recession era, he explained, so “today’s policyowners have little reason to move their VA money if their purpose is to get a better guarantee from another contract.”
This situation may continue for some time. The carriers Ruark has been talking to indicate they have no plans to do so anytime soon.
Also, although the stock market has been up, the living benefit rider rollups have increased too, so the riders’ comparative value may still be high enough to keep surrenders down.
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