In its Best’s Special Report, titled, “Annuity Surrenders Up Through 3Q23, Beating Premium Growth,” AM Best notes that rising interest rates, which the life insurance segment has not seen in decades, have generated the prospect of disintermediation risk.

“Runoff annuity insurance companies or those that focus on block acquisitions rather than organic growth and can’t replace the business being surrendered are most likely to experience a shrinking asset base,” said Jason Hopper, associate director, AM Best. “It’s possible that maturing bonds may need to be used to cover additional surrenders instead of being reinvested.”

Surrender benefits topped $100 billion in fourth-quarter 2022, as well as second-quarter 2023, compared with an average of $86 billion over the previous 15 quarters, according to the report. Surrenders in the second and third quarters of 2022 were among the lowest in four years, due partly to a $4 billion reinsurance transaction by Fortitude Re.

However, surrender values paid as a percentage of premium are among the lowest levels they’ve been since at least 2019, reflecting strong premium growth. Surrender charges are used to dissuade policyholders from taking this cash-out option, using a time period under which a fee can be charged on a percentage of the account value if surrendered early.

“The life/annuity industry is less concerned about surrenders once policies leave the surrender charge period, as assets purchased to back the liability are typically matched to the surrender charge period, and insurers will typically drop the crediting rate on policies once that period has expired,” Hopper said. “However, insurers want to retain customers and have them reinvest in new, current product offerings, which starts the surrender charge period over again. This helps transfer capital from fully liquid liabilities to new, potentially longer-duration policies.”

The analysis in the report also shows that the ratio of premiums to surrender benefits has been more steady for larger annuity writers over the last four years compared to medium and smaller-sized organizations, but have less of a cushion should surrenders materially tick up without the correlating premium growth. In a higher for longer interest rate environment, the annuity market will remain highly competitive, as many new companies have entered the space, including several new private equity and asset management-backed insurers, adding capacity to the market and strong sales of multi-year guaranteed annuities.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=339562.

To view a video with AM Best Associate Director Jason Hopper on this report, please visit http://www.ambest.com/v.asp?v=ambannuitysurrenders124&AltSrc=182 .

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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