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Variable annuity
• GLBs(guaranteed living benefits)
• GLWBs(guaranteed lifetime withdraw benefits)
• GMWBs(guaranteed minimal withdraw benefits)
• GMIBs(guaranteed minimal income benefits)
• GMABs(guaranteed minimal accumulation benefits)
• 78% of all new VA in market
• GLB=579billion= 38% of VA
What is GLWB?
• DEFINITION OF 'GUARANTEED LIFETIME WITHDRAWAL BENEFIT GLWB'
• A rider on a variable annuity that allows minimum withdrawals from
the invested amount without having to annuitize the investment. The
amount that can be withdrawn is based on a percentage of the total
amount invested in the annuity.
GLWB: who buys it?
Why most buyers are in that age?
• Most of they are baby boomers who are going to retire in near future.
• Increasing life longevity, this type of insurance provides guaranteed
life time cash flow.
• Finance crisis in 2008 changed people’s behavior: more precautious.
Source of Fund
• 68% from qualified money
• 32% from non-qualified money
What are qualified & non- qualified
• Qualified money is “before tax” money. This means you did not pay
taxes on this money when you invested it. While invested, this money
will grow tax-deferred. No taxes will be owed on gains within the
account each year and therefore you will not get a 1099 form each
year.. Eg: 401k plan?
• Non Qualified money is “after tax” money, the investment earnings
could be taxable each year.. For example, if you place your Non
Qualified investment dollars into a CD at the bank, you will have to
pay tax on the interest earnings every year. Each year, the bank will
send you a 1099 tax form showing you the amount of interest earned.
Interpretation of the source of fund
• Research shows as company attracts more rollover dollars, they will
likely experience higher withdraw rate from qualified fund.
• Thus, company should have a different strategy managing this money
and have sufficient liquidity.
• Transaction fee or( withdraw fee) also matters.
Risk for insurance company
• Underlying investment may underperform before or during the
withdraw period and the account balance might be insufficient to
cover the lifetime withdraw guarantee.
• Longevity risk: recall what we learned in math 471 & 472. The longer
the policy holder lives, the more the present value of future payment.
• Interest risk: different interest rate leads to different discount factor.
• But all the risks are common risks in general insurance products. They
are manageable also.
Change in benefit bases( large volatility in
market)
S&P 500 chart in 2011
Withdraw activity
average=5600
It’s important to understand the withdraw
behavior
• Because insurance company can decide how much cash needed and
maximize its profit.
• Source of fund and age of owners are the two major influences on
withdraw activity
• Customers who withdraw for two consecutive years are likely to make
ongoing withdraws.
By source of fund and age
Other factors impact withdraws
• Size of contracts
• Deferral incentives
• Duration of contract
• Channel through which the contracts were sold
Additional premium and net flows
• Many retail VAs allows owners to add premium after issue, though in
practice most contracts don’t receive ongoing deposits. For most
GLWBs, the calculation of the benefit base incorporates premium
received within a certain period of time after contracts issue.
Additional premium and net flows
Surrender activity
• Like withdraw activity, surrender activity is also very important for
insurance company for the similar reasons
Guaranteed Minimum Withdrawal Benefit GMWB
• A type of option that annuitants can purchase for their retirement
annuities. This specific option gives annuitants the ability to protect
their retirement investments against downside market risk by
allowing the annuitant the right to withdraw a maximum percentage
of their entire investment each year until the initial investment
amount has been recouped.
• The best aspect of this guarantee is that it protects annuitants against
any investment losses that have been incurred without losing the
benefit of upside gain.
GMWB VS. GLWB
• No life time guarantee
• But guarantee for a certain period
• The maximal annual withdraw amount is generally higher than that of
GLWB.
Benefit base
W withdraw VS. WT withdraw
Withdraw activity
• Same reason for all Vas riders to analyze the withdraw activity
Withdraw activity
Additional premium and net flows
• Many retail VAs allows owners to add premium after issue, though in
practice most contracts don’t receive ongoing deposits. For some
GMWBs, the calculation of the benefit base incorporates premium
received within a certain period of time after contracts issue.
Not as many as GLWB
GMWB surrender rate in 2011 is 7.9%
GMIBs(guaranteed minimal income benefits)
• A guaranteed minimum income benefit (GMIB) rider is designed to
provide the investor with a base amount of lifetime income when
they retire regardless of how the investments have performed. It
guarantees that if the owner decides to annuitize the contract (for
life, life plus a certain period, or the lives of two people), payments
are based on the amount invested, credited with an interest rate-typically 4-5%. An investor must annuitize to receive this benefit and
there is typically a seven-ten year holding period (in a few instances, a
seven-year holding period) before it can be exercised. Age limits may
also apply.
GMIBs(guaranteed minimal income benefits)
• Receiving a guaranteed minimum income benefit ensures that an
annuitant will receive a payment regardless of market conditions. This
minimum payment amount is predetermined by assessing the future
value of the initial investment. This option is only beneficial to
annuitants who plan to annuitize their annuity.
• It’s also 2nd most popular type of GLB in VA market. Sales are up to 25
billion. 26% of VA sales.
Owners’ profile
• Almost 2/3 of GMIB contracts were funded from qualified sources of
money, part of a trend towards a greater share of annuity contracts
being funded from qualified sources or rollover assets rather than
nonqualified source.
• Funding a qualified source of money is more common among younger
buyers, especially those under 70 ( can’t believe how they define
“young”)
• Owners under 60 count up to 1/3 of all owners.
Source of fund and ownership of GMIB
ownership of GMIB
Benefit base
• We use data of early 2011. 4 out 5 were “in the money” because of
the market loss in financial crisis.
Before financial crisis
So…..
• The ratio of contract value to benefit base is very bad in this case,
comparing to previous types of VA. Why?
• Maybe more portion of the money was invested in the equity market
rather than bond market.
• Could we interpret this type of VA has less volatility? And thus further
predict it has less surrender (withdraw) rate?
S&P 500 chart in 2011
Smaller change in percent of benefit base
• Also lets compare the change in percent of benefit base. For GLWB,
the change is about 9% but for GMIB which is just about 7%. Further
consider the behavior of market in 2011.
• Stays the same. GLWB is more vulnerable to the volatility of market.
Withdraw activity
Surrender rate
Surrender rate
Not likely
• Can’t simply make conclusion by few criteria. As actuaries, we need to
take thorough consideration and use scientifically and analytical
methods to make judgment rather than just simply use our intuition.
Guaranteed Minimum Accumulation Benefits
GMAB riders in variable annuities guarantee that the contract owner
will receive a minimum amount after a set period of time or waiting
period – either the amount initially invested or the account value with
a locked-in guaranteed rate, or market gains locked in during the
waiting period. The rider guarantees protection of the investment’s
value from a down market.
Sale of GMAB contracts
• Continued to decline
• Down 25 percent from $3.7 billion in 2010 to $3.2 billion in 2011 to
$2.4 billion in 2010.
Owner Profile
• GMAB buyers are typically younger than any other GLB buyers. In
2012, the average age of GMAB buyers was 53.2 years. Almost a third
of buyers (34 percent) in 2012 were under age 50
• Percent of GMAB buyers under age 50 increased from 30 percent in
2007/2008. to 45 percent in 2009 and 2010 before falling to 31
percent in 2011
• The average premium received for GMAB contracts in 2012 was $
89800 –lower than other GLB contracts, reflecting the lower
investable assets of the younger customer base
Ownership of Qualified and Nonqualified
GMAB Annuities
• For GMAB issued in 2012, 74 percent were qualified, compared with
68 percent of qualified contracts issued before 2012
• This aligns with a broader industry shift that LIMRA has tracked in the
total VA market, where annuities are increasingly being funded with
tax-qualified money, the bulk of which likely come from rollovers by
younger individuals
• Three fourths of the GMAB contracts issued in 2012 were qualified,
while two thirds of contracts issued before 2012 were qualified
Benefit Maturity
• GMAB benefit utilization simply requires the owner to keep the
contract in force until the day of benefit maturity
• At that point, if the accumulation benefit is in-the-money, then the
contract value is automatically set to the guaranteed benefit base
• Most GMAB benefits mature 7 to 10 years after they are elected
Withdraw Activity
• GMAB contracts are not designed for owners to take withdrawals, but
customers may take withdrawals for emergencies, or satisfy RMDs
• 17% of GMAB owners took withdrawals in 2012
• Around 80% of older customers took withdrawals from annuities
purchased with qualified money
• After age 70, the need for RMDs from qualified annuities forces
owners to take withdrawals (systematic withdrawals)
Surrender Activity
• GMAB have the highest overall surrender rates compared with other
GLBs, and the highest surrender rates among VA contracts issued
since 2004
• 9.9% in 2012
• Higher GMAB surrender rates are associated with younger owners,
particularly those under age 60 who took withdrawals before or in
2012
• There is little difference between persistency in contracts funded by
nonqualified and qualified money
• There is even less difference based on gender, or the size of contracts
Product and Benefit Characteristics
• GMABs are the least expensive GLB, especially for contracts issued
before 2010
• Most cost around 0.4 to 0.8 percent of contract value – either
including or excluding any fixed account balance
• A ten year waiting period is the most common guarantee period
• Annual step-up options have become more common, and caps on
benefits have become more prevalent