As market conditions, product designs, and regulatory expectations evolve, the importance of revisiting and refining dynamic assumptions for annuity products continues to grow, making it essential for insurers to begin proactive reviews. When interest rates began to rise in March 2022, new products offering more competitive credit ratings entered the market. Since then, many insurers have observed lapse rates at levels not previously experienced. Also, on the regulatory front, the emergence of principal-based reserving (PBR) frameworks, such as VM-22 and the Bermuda Economic Balance Sheet, requires insurers to use their own best estimate assumptions in reserving, including dynamic behavior on deferred annuity products. Moreover, the demand for more sophisticated asset-liability management programs has increased, driven by both regulatory evolution to PBR and insurers’ efforts to enhance return on general account assets.

This paper aims to analyze and model interest rate sensitivity in fixed index annuity (FIA) lapses, providing a framework for insurers to refine assumptions. We discuss:

• Economic drivers of surrender: The lapse decision as a choice between the economic value of the current policy and the value from replacement available on the market
• Representation in a dynamic formula: The additive lapse rate due to rate movement
• A study with industry experience: Uses a dataset on shock-year and post-shock-year accumulation FIA policies from several large carriers with robust option budget information