In the years following the 2008
recession, more customers have been clinging to their variable annuities instead of surrendering them.
In 2010 and 2011, 10% to 15% of variable annuities were surrendered to the insurance companies that sold them, meaning clients withdrew from their VAs during the surrender period. Those numbers are down from 25% to 30% of VA clients who redeemed their annuities in 2007, according to data from Ruark Consulting LLC. The research firm performed a study of 12 major carriers from January 2007 through March 2011.
Clients were even more reluctant to surrender VAs with guaranteed living benefits, including popular guaranteed-lifetime-withdrawal benefits and guaranteed-minimum-income benefits. They also clung to their VAs when these benefits were “in the money,” meaning that the benefit base used to calculate clients' lifetime withdrawals is higher than the actual account value of the annuity.
“It shows that as the benefits become more valuable relative to the account value, that the propensity to keep the policy continues to increase,” said Rich Tucker, vice president at Ruark Consulting.
But “in the moneyness” isn't the only driver behind clients' desire to hold on to their variable annuities. In the years after the
recession, fewer investments provided compelling returns, and investors became gun-shy about equities. Increasingly conservative variable annuities with less rich living benefits also have given VA holders little reason to surrender what they have now, Mr. Tucker said.
Indeed, low surrender rates aren't always a good thing for insurance companies, especially when the benefits are worth much more than the actual account.
“It can hurt a company if there are a lot of contracts that are in the money,” said Joel Levine, associate managing director of insurance at Moody's Investors Service Inc. “It means the guarantees are likely to be paid out ultimately because the account values are down.”
He added that it made sense that surrender rates were higher before the crisis. Back then, insurers had an arms race for VA living benefits and fought to attract consumer dollars. “Companies were competing heavily on guaranteed features and replacing each other's contracts,” Mr. Levine said. “Account values were so high that there was probably very little [business] in the money back then.”
To some extent, how an adviser received his or her commission when selling the annuity has had some effect on surrenders. “Policies with commissions spread over time tended to have fewer surrenders [compared with those with upfront commissions],” Mr. Tucker said.
