In a recent Special Report, credit rating agency AM Best highlighted a significant 18% increase in surrendered annuity policies through the third quarter of 2023, surpassing the growth in premium, which held steady at 17% during the same period.
Titled “Annuity Surrenders Up Through 3Q23, Beating Premium Growth,” the report sheds light on the challenges faced by the life insurance segment amid rising interest rates, a phenomenon unseen for decades.
Jason Hopper, Associate Director at AM Best, emphasised the potential disintermediation risk, particularly for runoff annuity insurance companies and those reliant on block acquisitions instead of organic growth.
Such entities, unable to replace surrendered business, are at risk of witnessing a contraction in their asset base. Hopper noted the possibility of using maturing bonds to cover surrenders rather than reinvesting them.
The report disclosed that surrender benefits exceeded $100 billion in both the fourth quarter of 2022 and the second quarter of 2023.
This spike follows an average of $86 billion over the previous 15 quarters. While surrender values as a percentage of premium are at their lowest levels since at least 2019, surrender charges, meant to discourage early policy cash-outs, play a pivotal role.
“The life/annuity industry is less concerned about surrenders once policies leave the surrender charge period,” said Hopper.
He explained that insurers aim to retain customers and encourage reinvestment in new offerings, restarting the surrender charge period. This strategy facilitates the transfer of capital from fully liquid liabilities to new, potentially longer-duration policies.
The report’s analysis indicates that larger annuity writers have maintained a more stable ratio of premiums to surrender benefits over the last four years compared to medium and smaller-sized organisations. However, these larger entities may have less room for maneuver if surrenders increase substantially without a corresponding uptick in premium growth.
The current higher-interest-rate environment is keeping the annuity market fiercely competitive, with new entrants, including private equity and asset management-backed insurers, contributing to added capacity. Notably, the market is witnessing robust sales of multi-year guaranteed annuities.
