According to Reuters’ “Analysis: Annuity persistency raises risks for insurers” by Ben Berkowitz, investors are holding onto their annuities longer. While the short term effects of this trend are good for insurance companies, it increases their long term risk once all of the guaranteed benefits must be paid. Insurers like Genworth, MetLife, and Hartford Financial refer to the trend as “persistency” and all three say that they have seen an increase. It makes sense for investors to hold onto their variable annuity products longer, based on lower interest rates and a relatively low stock market. New policies are also being sold at a rapidly increasing rate. MetLife saw a third quarter increase for their variable annuity sales of 35%, totaling $4.7 billion. The guaranteed living benefits associated with variable annuities ensure a stream of income for investors and that is currently more beneficial than anywhere else they would put their money in the market.
As the risk to insurers has increased, they have made some changes to protect their future stability. Some companies have increased prices or restricted certain asset allocations. Others have changed hedging, taken away some features, and even updated the way they perform their accounting. Ameriprise Financial will now change its amortization for variable annuities to longer than 20 years as people hold onto their products longer. MetLife says that they don’t have any plans currently to extend their 20 year amortization schedule, but if the trend continues, other companies might follow Ameriprise’s accounting change lead. Time will tell how the market changes and how investors react with their variable annuities.