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Annuities have surrender charges since the money in the annuity is invested in different timed instruments. The insurer maximizes their rate of return (and yours!) by having sufficient time to manage the funds.
If there is a constant flow of complete surrenders, the extra expense would make it more difficult to earn the desired rate of return.
That is an excellent question! I think a lot of people have the impression that like in the old days of Bonnie and Clyde that banks and insurance companies take your cash and pile it up in big vaults to gather dust until needed. The truth is that almost as soon as you've given it to them, they've turned around and used it to pay off something they owe on, or invested it to make some money for themselves. Therefore, when you buy an annuity, and promise them a number of years to use that money before they have to pay you, and then tell them you want it back, they are going to take a loss. They have to scramble to get your cash ready for you, and so that they don't lose money, they pass that loss on to you in the form of a surrender charge. Their hope is that by putting a steep fee on taking the money out early, that you won't, and they can make money too. I am very careful who I sell annuities to, there has to be a very good liquidity and cash flow on your part to make this a good investment vehicle. I hope this helps, thanks for asking!
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If there is a constant flow of complete surrenders, the extra expense would make it more difficult to earn the desired rate of return.