Many times, I wonder if today’s annuity rates will be the best we are going to get. As of now, a 3.00% crediting rate (on average) can be had on declared fixed rate deferred annuity contracts with durations of seven years or longer, generally from carriers with an AM Best FSR of A- or better. In the fixed immediate annuity market and unless you are able to incorporate some kind of lifetime payment contingency either via a lifetime or temporary life annuity for the mortality credits, you are facing meager interest rate only earnings. Fixed index annuities (FIAs) are also impacted with carriers hamstrung by low current interest rates that dictate interest crediting formula outcomes and rider terms and conditions allowances.
In the book, “The Signal and the Noise”, Nate Silver emphasizes its observed human nature to consistently overestimate the degree of predictability in complex systems. We routinely overrate our own capacities and exaggerate our abilities to shape the future.[I]
I’m firmly in the thought camp of; it almost boarders on the ridiculousness, that it’s even conceivable a handful of individuals, central bankers (Federal Reserve), think they can manage to some successful outcome, the navigation of a system as complex as out national economy and emerge smelling like a rose. The betting odds are not in their favor.
While consumers are banking on a few central bankers voting to permit a bank overnight lending rate to rise in tiny portions over the next several years, I don’t know that generosity will have any meaningful impact on long term interest rates insurance companies rely on to set annuity pricing. Even if these short term rate increases begin, will they be sustainable or like other countries’ experience, will the Federal Reserve be compelled to backtrack?[ii] Regardless what the Federal Reserve decides, long term rates, 5, 10, 15, 20 and 30 year durations will continue to be set by the market place and the movement of Adam’s Smith “invisible hand”.
For annuity consumers, it’s time to look past the Federal Reserve to global systemic economic problems. If things don’t go well around the world and there is a loss of confidence, money will flow into this country, long considered a “safe haven”. In simple economic terms, individuals/institutions demand for high quality US securities could increase which may depress long term interest rates for many more years.
On the mortality estimate front also impacting fixed immediate annuity (life contingent) pricing in addition to long term interest rates, carriers, as a group have yet to adopt the new NAIC Model Regulation 821. This regulation compels utilization of the new 2012 Individual Annuity Reserve (IAR) mortality table lengthening lifetime expectations. This is partially due to States that have not yet approved the model regulation and states that have approved the model regulation but gave carriers to January 1, 2016 to begin implementation.
A reserving analysis completed by the Society of Actuaries (SOA) indicates company reserves climb substantially when implementing the 2012 Individual Annuity Reserve (IAR) mortality table with “projection G scale” vs. the old Annuity 2000 rate table that many companies are still transitioning from. The projection G Scale is basically an additional adjustment to account for expectations of improving mortality after 2012. As Reported by Karen Rudolph of Millman Inc., regarding the reserving requirement differences when moving from the Annuity 2000 rate table to the Annuity 2012 IAR for a male age 65, annuity reserves increased 9.90% at issue and an increase of 15.10% in reserves 10 years after issue.[iii]
The old Annuity 2000 rate table was developed not from a study but from compiling data occurring after 1983 and it didn’t account for improving mortality estimates. That’s why when you read deferred annuity contracts (and most VA contracts) and life policies (UL and WL) using the Annuity 2000 rate table you have “age setback” language, and age limitations regarding contract and policy settlements. For example; for every 5 contract or policy years after 2000, the annuitant/insured ages decreases by 1 year for the settlement guaranteed annuity rate or a lifetime annuity is available but not to annuitants/insureds older than age 80 or 85 instead, they may elect from period certain only selections and so-forth and so-on. Home office actuaries use these techniques and others to self-adjust the Annuity 2000 table to account for now expected future mortality improvements.
In fact, reviewing recent deferred annuity contract guaranteed settlement rates for current contracts, you will see a substantial diminishment vs. settlement rates offered just a few years ago. Contracts utilizing the 2012 IAR with projection scale G at 1.00% indicate a guaranteed monthly annuity purchase rate of $4.29 per $000 of applied premium for a 10 year period certain and lifetime thereafter annuity for a male age 70. The Annuity 2000 table at 3.00% shows a monthly purchase rate of $6.26 for the same annuitant. An old 1974 individual mortality table at 5.50% indicates a monthly purchase rate of $8.14! This must be really terrible for this carrier because the guarantee can’t be changed so the reserve posting must be through the roof. The only saving grace is the book for these contracts has to be relatively small due to the passing of time. Current pricing for the same immediate annuity indicates a monthly purchase range from about $5.80 – $6.00 per $000 of applied premium depending on the carrier. Because annuity payment guarantees are written in annuity contracts and life insurance policies, their implementation is easy to see. Current immediate annuity pricing utilizing the 2012 IAR table is not so easy to discern because of the mixing of interest and mortality pricing elements on per thousand of applied premium purchase rates.
Everything else being equal, annuity payments are reduced when lifetime expectations lengthen because carriers have to guarantee making payments for longer periods of time vs. shorter periods of time when people are assumed to die at earlier ages.
The States are worried. They keep hammering carriers to continually post additional annuity liability reserves. From a consumer pricing perspective, this of course makes the contracts’ (deferred and immediate annuity) pricing much less appealing, as the carriers elect to just diminish the value of their guarantees and current pricing. The States have a right to be concerned because there is historical precedent for negative financial impacts on carriers that misprice annuity contracts. Annuity premium volume first skyrocketed during the 1930s. Carriers then, just like today, were caught in a generally declining interest rate market (too lower and lower lows) and initially used estimates from an antiquated mortality table (not adjusted for gender) developed just after the American Civil war in the late 1860s. This table indicated life expectancies to be much shorter than they really were in the 1930s. It literally took decades for carriers to work off annuity losses. The States don’t want a repeat occurrence because few have the resources to bailout weak annuity carriers thus the additional reserve requirements.
So, it falls to the agent to work with what we have now, too convince consumers to “buy up” because it just might be the best deal they get for many foreseeable years. “Always Keep Your Hands Up”.
[i] “When History and Finance Go Wrong,” ThinkAdvisor, http://www.thinkadvisor.com/2014/09/29/bob-seawright-when-history-and-finance-go-wrong, from Research Magazine, October 2014, September 29, 2014, accessed September 2015.
[ii] “Is the US Headed For Negative Interest Rates?”, CNN.com, http://www.cnbc.com/2015/10/21/is-the-us-headed-for-negative-interest-rates-commentary.html, October 21, 2015, accessed October 2015.
[iii] “Mortality Table Updates – 2012”, Society of Actuaries, Small Talk, October 2012, issue 38, Rudolph Karen.