Fantasy-world Returns for Equity Indexed Annuities

When research fails to meet the basic standards of academic rigor, its conclusions should be questioned.  One such case is a recent paper, Real-World Index Annuity Returns, whose conclusions you should trust at your own risk.

The paper purports to show that equity-indexed annuities (EIAs) outperformed an appropriate benchmark and relies on a sample of actual contracts obtained from insurance companies to prove its point.

The data presented support no such conclusion.

The paper also criticizes previous research on EIAs for relying on a series of “dubious” assumptions.

That criticism is unjustified.

The paper appeared in the March issue of the Journal of Financial Planning and was authored by Geoffrey VanderPal, Jack Marrion and David Babbel.  VanderPal is an advisor based in Austin, TX.  Marrion operates a web site and service that provides information to the insurance industry, mostly to help promote the sales of EIAs.  Babbel is a professor at the Wharton School of the University of Pennsylvania who has consulted to the insurance industry.  The authors said they did not receive any compensation for this research.

Let’s look first at their study of the so-called real-world EIAs and then at their critique of previous research on this topic.

Failing a basic test

A standard practice for evaluating any published paper is to ask the authors for their underlying data, in order to replicate and verify their results.   I asked all three authors for the data they used to calculate the performance of the “real-world” annuities.  Marrion told me that the insurance companies had provided data to them confidentially and they did not have permission to share the data with me.

Instead, they provided the names of all 27 insurance companies that submitted data.  Our research staff emailed all 27 in early May, with the following results:

  • 1 company said they did not participate in the study
  • 3 companies said they were not willing or could no longer provide the data
  • 1 company said they would be willing to provide the data (at that point we had already determined that we could not obtain enough data to verify the results, so we declined their offer)
  • 1 company shared the data
  • 21 companies did not respond

What we have, therefore, is a study that at best cannot be verified.

While you ponder that, consider that the study examined 172 policies.  The average policy size for an EIA is $50,000.  Over $100 billion of EIAs have been issued, so this study examined less than 0.01% of the EIA universe.

Moreover, the insurance companies chose which policies they submitted.  There was no expectation, much less assurance, that they would randomly select the policies.