Mortality Surprises Lurk In The VA Books

At the big picture level, the increasing longevity of Americans continues to fascinate and impress the insurance and financial industry. Our longer lives have numerous implications for consumer financial needs as well as business strategy.

When looking at more discrete business lines, the picture becomes more varied, and surprising.

Take some of the findings from the variable annuity industry experience study completed this year by Ruark Consulting, an actuarial firm in Simsbury, Conn.

It found that mortality varies by type of guarantee included in the annuities, the tax status of the policy (tax qualified or not) and contract size. So, though overall longevity continues to rise in the U.S., the trend is not everywhere.

Some highlights

Variable annuity contracts that contain a living benefit guarantee have lower mortality compared to standard morality tables, the study found. But contracts with rich death benefit guarantees go in the other direction — they have higher mortality.

What’s more, the highs and lows were not off the standard by just a point or two. According to Ruark, both trends were “approximately 10 percent off the standard mortality table.”

Ruark vice president Peter Gourley believes this two-way trend reflects what actuaries like to call the “selection effect.” That is, people select the features that are in their best interests. “For instance, if a client doesn’t expect to have great longevity, the person probably won’t purchase a contract with a living benefit,” he told AnnuityNews.

“Those features cost extra, so the client will likely say, ‘Why pay for something I don’t expect benefit from?’”

As a result, more variable annuities with living benefit features are being purchased by healthier people than by those who are less healthy. This is showing up in the mortality results.

As for tax status, the study found that mortality rates for variable annuities are nearly 15 percent lower for tax-qualified contracts than for non-qualified contracts.

Only some of that difference is attributable to a higher mix of qualified contracts with a living benefit, the study said. “The remainder is more difficult to explain and may be attributable to different purchase motivations on the part of owners of qualified versus non-qualified contract.”

As for contract size, the study found that the mortality trends noted above seem to be “magnified by contract size.” For example, large-sized variable annuities with the living benefit feature elected tend to have even lower mortality than comparable small-sized variable annuities.

This outcome may reflect the fact that more savvy buyers who buy larger contracts likely have access to more sophisticated advisors who are more careful in helping clients make choices, Gourley said.

Implications

The findings may have implications for variable annuity carriers that are reviewing pricing for their variable annuity policies, the actuary said.

“They need to set the price right, so they typically take into account what the data says about better mortality and worse morality. That could mean they might decide to introduce a price increase for variable annuity living benefit features, due to the greater longevity.”

Some carriers have already done this, Gourley added. It might work out that these carriers will be in better shape on mortality experience on the new business they are writing. “It could also work out that their new prices were too conservative, so then they might introduce a price reduction when they do the next review.”

As for the impact on advisors, the mortality findings do not affect them directly, he said. However, if a carrier does decide to, say, raise living benefit rates due to greater longevity on contracts having the features elected, the advisors will see the change and will need to decide the best course to follow going forward.

In general, the study shows that advisory guidance — for instance, on large-sized cases — likely does have a “second-hand effect” on mortality results, Gourley said. “The guidance is involved in the results.”

But that is a part of the business. Advisors won’t need to do anything different because of the new findings, he said. “To do a good job for the client, advisors need to do what they already do…including taking the client’s longevity into account when providing advice.”

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.