An annual study from Milliman of guaranteed livingbenefits on variable annuity policies shows that withdrawalutilization on guaranteed lifetime withdrawal benefits (GLWBs) isnearly 15 percent within the first 12 months ofeligibility.

The study found that about 6 percent of policies beganwithdrawals 13 to 36 months after eligibility, and 2 percentstarted withdrawals more than 36 months after becoming eligible.

The study is still under way, so these rates will rise as morebusiness reaches the later stages of the periods currently understudy.

Withdrawal benefit exercise rates are also significantlyinfluenced by the degree to which withdrawal benefit baseexceeds the account value ("in-the-money"). The medianexercise rate if the benefit was out-of-the-money was reported as13.2 percent. This rate increased to 13.9 percent when thein-the-money percent was less than 20 percent, to 25.2 percent whenthe ITM percent was at least 20 percent, but less than 50 percent,and to 53.9 percent when the ITM percent was at least 50 percent.

Another factor that influences withdrawal benefit exercise ratesis attained age. Such rates increased from a median of 5.6percent for attained ages younger than 60, to 16.7 percent forthose in their 60's, to 34 percent for those in their 70's, and to42.2 percent for those at least 80 years old.

The survey indicated how lapses compare with the ITM-sensitivelapses insurers expected. The following table shows thecomparison for GLWBs, but experience is similar for other GLBs.

Survey participants reported the percentage of variable annuity sales that were external exchanges(nonqualified 1035 exchanges, qualified rollovers, and directtransfers) over the survey period. The median of reported exchangesindicated an increase from 18.3 percent in 2009 to 23.6 percentduring the first half of 2010; however, this is still significantlybelow the level reported for 2007 (39.7 percent). Externalexchanges slowed down as GLBs on existing VAs became deeperin-the-money.

The survey reported that about 95 percent of variable annuitiesoffered in 2009 and in the first half of 2010 included some form ofGLB. The purchase of any GLB by policyholders has increasedconsistently, on average, from 2006 through 2009, with a slightdecline during the first half of 2010. The average electionrate of any optional GLB during 2009 was 74.5 percent for 2009 and73.8 percent for year-to-date (YTD) June 30, 2010. Other contractscontain automatic GLBs; consequently, the effective purchase rateis higher in aggregate.

The scope of the survey covered four types of GLBs that aregenerally offered in the VA marketplace: guaranteed minimum incomebenefits (GMIB), guaranteed minimum withdrawal benefits (GMWB),guaranteed lifetime withdrawal benefits (GLWB), and guaranteedminimum accumulation benefits (GMAB). Hybrid GLBs refers tomultiples GLBs that are packaged together, such as a GMAB with aGLWB.

GLWBs continue to be the most popular GLB type offered andelected. The percentage of VA sales that offered an optional GLWBhas increased from a median of 75.4 percent in 2006 to 95.1 percentduring the first half of 2010. Purchase rates of GLWBs alsoincreased over the same period from a median of 54.2 percent in2006 to 69.2 percent in 2009 and YTD June 30, 2010.

Events of the past few years have led VA carriers to designproducts with more flexibility. Most current VA policies allow forthe adjustment of rider costs on inforce policies. Many still allowa change to fees only upon a step-up to the benefit base, and someallow a change on a quarterly basis or on annual policyanniversaries. There has been some movement by VA carriers to allowfor cost adjustments on inforce policies at any time.

Variable annuity carriers that issue at least one type of GLBwere invited to participate in the survey. There continues to be ahigh level of interest in this topic in the marketplace today with18 carriers participating in the study. Eleven of the 18participants ranked in the top 20 based on new VA sales (accordingto Morningstar Annuity Research Center.)