What's Happening?
Milliman, a global actuarial and consulting firm, has released updated research indicating that surrender rates for variable annuities with guaranteed living withdrawal benefits (GLWB) have more than doubled from 2022 to the end of 2024. The findings
are part of Milliman's ongoing Variable Annuity Industry Experience Studies, which analyze policyholder behavior across 23 companies over 17 years. The studies also show that the rate at which GLWB contracts are initiating income during the 2023-24 period is approximately 20% higher than in the previous two years. Ben Johnson, a consultant with Milliman, noted that these behaviors might suggest policyholders are replacing VA GLWBs with alternative products, although direct data to confirm this is lacking. The studies focus on surrender behavior and partial withdrawals, highlighting increased surrender rates even when charges apply, contrary to traditional expectations.
Why It's Important?
The increase in surrender rates for variable annuities with GLWB is significant for life insurers, as it impacts their balance sheets and financial planning. Higher surrender rates may reflect policyholders' responses to rising interest rates and the attractiveness of alternative annuity products. This trend could lead insurers to reassess their product offerings and risk management strategies. Contracts that are 'very deep in the money' are less affected by this trend, suggesting that policyholders are more likely to retain contracts with higher guarantee values relative to account values. Insurers must closely monitor these patterns to understand policyholder risk and adapt to changing market conditions.
What's Next?
Insurers are expected to continue tracking these evolving surrender patterns to better understand policyholder behavior and risk. The potential replacement of VA GLWBs with fixed indexed annuities (FIAs), which offer high premium bonuses, could further influence surrender rates. Insurers may need to adjust their distribution strategies and product designs to remain competitive. Additionally, the ongoing analysis of surrender data by Milliman could provide further insights into policyholder decisions and market trends, helping insurers to refine their approaches to annuity offerings.
Beyond the Headlines
The shift in surrender rates may indicate broader changes in consumer preferences and financial planning strategies. As interest rates rise, policyholders might seek products that offer better returns or lower risk. This could lead to increased competition among insurers to offer attractive annuity products. The trend also highlights the importance of understanding policyholder behavior and the factors influencing their decisions, which could drive innovation in the insurance industry.
