Welcome to The Actuary magazines first underwritten annuities forum with leading industry providers, facilitated by Sarah Bennett
To kick off with a simple question, what exactly does a personal underwritten annuity mean?
CB: This is literally as simple as it sounds; we scrutinise each person's lifestyle and medical history and offer those individuals with reduced life expectancy better annuity terms. At Aviva, we believe that all annuities should be fully underwritten to ensure that customers receive the correct level of benefits in retirement.
Looking at the growth in sales, are enhanced underwritten annuities becoming the standard?
TG: A personal underwritten annuity means taking into account factors such as health and lifestyle to determine life expectancy and we believe that, at some point, disclosing this information will become the norm. However, the fact you can be better off through being in poor health is a difficult concept for consumers to understand. Customers need and deserve a conversation to explain the benefits.
VO: In the UK, according to the ABI's quarterly statistics Q3 2012, 80% of retirees annuitise and, in the 12 months to September 2012, over 30% of the funds annuitised were underwritten.
TG: Last year, of the 200,000 annuity contacts sold externally, where consumers shop around and buy their annuity from another provider, around 46% were enhanced annuities. On the other hand, of the 220,000 contacts sold internally, where customers buy their annuity straight from their pension provider, less than 5% were enhanced annuities. Estimates are that 50% to 60% of consumers could qualify for an enhanced rate and so there are still a lot of people potentially missing out on extra income.
Why is take-up in the internal market slower?
TG: Externally, many consumers get financial advice and it seems that checking for qualification for an enhanced rate is fast becoming part of many advisers' routine process. As well as severe illnesses, enhanced annuities now cover lifestyle-type health risks, including blood pressure, cholesterol and body mass, which means qualification for extra income is much wider than it used to be. Many financial advisers therefore ask all their customers to complete a lifestyle/medical questionnaire just to be sure they don't miss out. Poor market conditions and falling annuity rates have also focused minds on squeezing out as much retirement income as possible, making enhanced annuities worth consideration. When it comes to internal sales, some companies simply don't offer an enhanced annuity product to their maturing pension customers. Also, low awareness of annuity options, smaller pot sizes and a lack of advice makes it easy for many in this group to end up with a poor outcome, including missing out on enhanced terms.
How can we encourage consumers to shop around?
TG: From 1 March, the new ABI code of conduct on retirement choices will bring about consistency in the communications that pensions companies have with their customers in the run-up to retirement. The objective is to get consumers to make more informed choices about their retirement income and that includes the decision to shop around.
CB: The adoption of common quote forms and the recommendations made in the ABI code of conduct on retirement choices are already helping. In addition, although the internet is undoubtedly a useful resource, we believe that all retirees should make sure they have a face-to-face conversation about their retirement needs.
VO: Online aggregators are driving awareness, with research tools such as online calculators providing the opportunity for annuitants to shop around and compare incomes instantly. Inertia is also a challenge - it's still 'easier' to accept an offer from an existing provider than to shop around for what may seem a modest difference to many with smaller pots. This has led to calls for all annuities to be underwritten.
Could customers lose out by shopping around?
CB: Providing additional information around personal health and lifestyle choices doesn't ever decrease a standard annuity rate - if the conditions are very mild, they may have no effect on the rate; however, if more severe, they can and do increase annuity rates.
What role should financial advisers play?
SL: New rules on financial advice that came into force this year put more pressure on intermediaries to justify their costs, and taking a more detailed interest in clients who may be about to commit many tens of thousands of pounds is one way of doing this.
CB: Financial advisers play a key role in getting the right annuity for customers. This may increase the cost of service for advisers, but we believe that they need to be able to charge an appropriate amount for the service and anticipate that the cost will reflect this.
VO: Independent financial advisers (IFAs) are best placed to guide the customer through the decision process. But, for most IFAs, it may only be financially viable to offer advice on larger pots, where the choice isn't whether to select an underwritten annuity but whether to buy an annuity at all. The success of aggregators offering non-advised comparison services was well established pre-Retail Distribution Review (RDR) and is expected to continue. This may mean, post-RDR, we could see a steady shift of consumers choosing non-advised routes.
Is 'portalisation' is a good or bad thing?
AT: 'Portalisation' is a bit of a double-edged sword. It will open up underwritten annuities to a wider audience as portals move towards direct-to-client offers, and annuity providers move their propositions onto various consumer comparison websites. However, automating quotes will always restrict the underwriting philosophies to the same data set. There are moves to develop more sophisticated messaging to flag condition areas and/or combinations of risk that would be better reviewed by a human underwriter, but these involve quite significant system development and industry 'will'. Underwriters would welcome these referrals, especially as the most accurate disclosures come from the clients rather than from their advisers.
TG: 'Portalisation' is a good thing as it facilitates a speedy and efficient service for intermediaries and enables consumers to complete an online medical form if they want. The person best placed to complete the medical form is the consumer or a medical professional on their behalf, and so all portals should facilitate this and ensure the question set is comparable with the industry common quote request. For more complex medical conditions, a paper form is probably the best option.
How will distribution of underwritten annuities evolve in future?
VO: The evolution of online non-advised channels has been rapid. Now we are seeing increasing discounting between non-advised services as competition increases. Of equal importance, we see workplace distribution as critical to overcoming inertia at the point of retirement. This is where, over the long term, we see the value from auto-enrolment driving up the size of retirees' pension pots, thereby increasing the potential for market growth.
Will we see a trend towards streamlined or detailed underwriting going forward?
SL: About six years ago, key players in the industry worked together to replace medical questionnaires with the more detailed industry-standard common quotation form. Effectively, shallow underwriting was considered obsolete and all of us who knew its limitations were keen to replace it with something better. Its re-emergence is on the basis that streamlining the process by basing decisions on a few broad factors rather than many detailed ones could cut costs. But that's not great for customers, who may miss out on income.
Will additional layers of underwriting further complicate the purchase of an annuity?
CB: We don't believe that asking customers to provide a full set of information, which could increase their income in retirement but never decrease it, can be bad for customers in any way.
What is wrong with the existing system?
CB: The existing system can be confusing. All customers deserve a conversation about their retirement needs, regardless of the size of their pension pot. Such conversations can lead to retirees considering options they would not have thought about. For example, some may assume an 'enhanced' annuity from one provider will always pay a higher income than a standard annuity from another. This isn't always the case. Some competitive standard annuities may offer a higher rate than an 'enhanced' personally underwritten quote from a less competitive provider. But some enhanced annuities may include a narrower range of underwriting factors than another standard annuity, which may be priced to include factors such as postcode or smoking.
What would be your idea of Utopia in this market?
TG: For everyone to understand the benefits of enhanced annuities and to be willing to complete a lifestyle/medical questionnaire. Also for companies to be forced to offer an enhanced annuity to internal customers, either themselves or through another provider.
What does the future hold?
SL: Technology is allowing us to gather more information, more cheaply than ever before and to understand what those numbers mean in finer and finer detail. That will define the marketplace as insurers fight to create the intellectual property that gives them a sustainable competitive advantage.