Given rising interest in 2022 and 2023, we conducted a survey of 13 Fixed Indexed Annuity (FIA) and Multi-Year Guaranteed Annuity (MYGA) writers on several aspects of dynamic adjustments to base lapse rates due to differences between their current and perceived market or competitor crediting rates.

Our approach

We asked a total of 19 questions on the following aspects of dynamic lapse adjustments to base lapse rates:

• Participants’ perception of the hypothetical competitor rate
• Elements of participants’ expected lapse rates
• Limits to the dynamic adjustments
• Likelihood of changing the dynamic adjustment methodology

While most of the questions were multiple choice, participants provided insightful commentary on their choices. We further supplemented the survey results with our analysis of industry policy data from Milliman Recon®.

Survey results

The participants have a wide and insightful approach to dynamic lapse adjustments. Overall, these formulas have been developed with a combination of company experience and actuarial judgment.

Key findings include:

• The development and calibration of competitor rates varies across survey participants and are widely utilized in the dynamic lapse formulas.
• Surrender charges are commonly incorporated both in base lapses and dynamic lapse formulas while some companies incorporate policy duration and others do not. MVAs are not always incorporated, and their adjustment varies by company. With the introduction of predictive models, formulas have evolved to use additional variables in their dynamic lapse formulas.
• All participants apply limits to their dynamic lapse formula. These limits vary in size and the duration stage of the policy.
• In 2023, participants experienced high lapsation in general. Lately, on average, actual lapse rates have been very close to expectation for FIAs without GLWBs while FIAs with GLWB have on average somewhat higher lapses than expected. MYGAs experience has been a mix of higher than and lower than expected lapses.
• Participants have been adjusting and changing their dynamic lapse formulas to address anticipated experience considering excess lapsation over the past year. We expect companies will continue to evolve their dynamic lapse expectations as newer techniques and rapidly emerging experience not previously available due to increasing interest rates continues to evolve.

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