Skip to main content
The Actuary: The magazine of the Institute and Faculty of Actuaries - return to the homepage Logo of The Actuary website
  • Search
  • Visit The Actuary Magazine on Facebook
  • Visit The Actuary Magazine on LinkedIn
  • Visit @TheActuaryMag on Twitter
Visit the website of the Institute and Faculty of Actuaries Logo of the Institute and Faculty of Actuaries

Main navigation

  • News
  • Features
    • General Features
    • Interviews
    • Students
    • Opinion
  • Topics
  • Knowledge
    • Business Skills
    • Careers
    • Events
    • Predictions by The Actuary
    • Whitepapers
    • Moody's - Climate Risk Insurers series
    • Webinars
    • Podcasts
  • Jobs
  • IFoA
    • CEO Comment
    • IFoA News
    • People & Social News
    • President Comment
  • Archive
Quick links:
  • Home
  • The Actuary Issues
  • May 2016
05

The growth marches on

Open-access content Wednesday 4th May 2016 — updated 5.50pm, Wednesday 29th April 2020

Is the increasing use of medical underwriting in bulk annuity pricing now inevitable? Costas Yiasoumi examines how MUBAs have affected the pensions industry

2

—


Prelude

The article 'Evolution or revolution' (The Actuary, June 2014) introduced the innovation of using medical and lifestyle information to price bulk annuities. 'Slicing and pricing: medical underwriting' (The Actuary, August 2015) explained how medically underwritten bulk annuities (MUBAs) can be used to 'top slice' the largest pensioners in a pension plan to de-risk concentrations of longevity exposure. So, the question is, where to next?

Over that time, MUBAs have grown from circa 3% of all bulk annuity transactions under £100m in 2013, to circa 10% in 2014 and to over 25% in 2015. There have also been two MUBA transactions greater than £100m, one of £206m and one of £230m. Trustees of over 75 pension plans have purchased MUBAs, representing over £2bn of premium since 2013.

Is the increasing application of medical underwriting in bulk annuity pricing now inevitable or will it recede into the actuarial history books as an interesting but temporary innovation?

Why does this matter?
MUBA growth has been fuelled by (a) the attractive pricing that has been seen by trustees and advisers, and (b) the ease with which MUBAs can be used to insure small sub-groups of large liability pensioners via 'top slicing'.

There are thousands of defined benefit pension plans on the road to annuitisation - for many, MUBAs may enable this sooner and at lower cost.

So tell me why medical data make a difference?
A key ingredient for pricing is life expectancy. The more confident an insurer is in its life expectancy assumption, the lower it can price a bulk annuity versus an equivalent pension plan with the same life expectancy, but with less insurer confidence in that assumption.

That doesn't mean other data is ignored. Pension amounts, postcodes, industry type and so on are still used, but medical and lifestyle data adds an extra dimension to traditional pricing methods.

For a single pensioner annuity, the benefit of that medical and lifestyle data can be enormous and probably swamps all other competitive differentiators between insurers. But the impact diminishes as the number of pensioners being insured increases until it is no longer a major competitive differentiator - that is, the 'law of large numbers' kicks in.


Figure 1

Does that mean medical underwriting is a 50/50 game?

Yes and no. 

Without prior knowledge of a pension plan's health profile it is 50/50 as to whether the membership is more or less healthy than "average". But importantly, as explained above, by virtue of having knowledge of the health profile of the membership there is more confidence in the resulting life expectancy assumption. 

Add these two aspects together and the net result is lower pricing on average - so better than 50/50 overall. Pension plans with poorer health characteristics attain even lower pricing; those with much better health characteristics receive higher pricing. Cross subsidies are reduced but this means a wider variation of pricing between pension plans.  

The healthiest pension plans may have been better off purchasing a traditional bulk annuity (and traditional insurers would be better off not writing such plans!). 

In this context, health is measured relative to the average for the relevant socio-economic group. So a white collar pension scheme is "healthy" if that is versus the average health for a white collar socio-economic group. 


Figure 2

What number of pensioners is the sweet spot? 

There is no definitive answer. 

Small pension plans are particularly suited to MUBAs for the reasons described above, and will find ready attention from insurers concentrating on MUBAs. 

Medical underwriting is highly unlikely to be a dominant factor for transactions covering, say, 1,000 pensioners. But the precise biting point cannot be certain. It will depend on factors such as industry type, homogeneity of the membership, member ages, as well as the relative strength or weakness of the other competitive factors for pricing. Even where medical underwriting might generally be expected to offer a better deal versus traditional pricing, that might not always be the case (and vice versa) as the specifics of each transaction will vary. 

The largest MUBA transactions have covered a few hundred members - the likelihood is that a practical maximum benchmark size will develop over time within the industry, based on the experiences from actual transactions.

What about top slicing? 

Even the largest pension plans have potential to use MUBAs.

Most pension plans have a skewed profile of pensioners; the ex-CEO in a £5 million pension plan representing 20% of liabilities or the 100 largest pensioners in a £1 billion pension plan representing 10% of liabilities.

Before MUBAs "top slicing" (insuring the pensioners with the largest pensions) was uncommon. Medical and lifestyle data offers significant extra underwriting insights to traditional rating factors meaning a more refined life expectancy calculation. In all types of insurance, more data = less uncertainty = sharper pricing. 

A single top slice MUBA or progressive layers of top slicing MUBAs can be an effective way to insure liabilities. There have been various top slice transactions by small and large pension plans with premiums of up to £230m.

This is all very complex - how can trustees decide whether to request medically underwritten pricing? 

The good news is, there is a way.


Figure 3


The decision on top-slicing might be slightly more complex. This is because if trustees undertake a top-slicing transaction they may be asked to supply the underwriting information from that transaction to insurers quoting on subsequent future bulk annuity tranches. Those insurers may take this into account in their pricing especially if the period between the transactions is not long. If that original underwriting data showed that those members were particularly healthy that may lead to a higher price for subsequent future tranches.

What about insurers that do not use medical data?  

This is where things start to get interesting. At present, there is polarisation between those that use this method for pricing bulk annuities and those that do not. Over time, if medical underwriting becomes more and more prevalent, the differentiation may blur.

Figure 4


The future 

There is no doubt that the growth in MUBAs has been beneficial to the pensions industry. Based on the cost savings typically reported to date, UK pension plans have collectively saved tens of millions of pounds in bulk annuity premiums since 2012. 

How prevalent MUBAs become in future remains to be seen. However, should the usage of medical and lifestyle data in pricing continue to generate lower premiums, as it appears to have done to date, usage will hopefully continue to rise as it should do in any well functioning market.

Further reading: 'The Good, The Bad and The Healthy', The Pensions Institute, January 2016, www.pensions-institute.org/reports/GoodBadHealthy.pdf


Costas Yiasoumi
is director of defined benefit solutions at Partnership Assurance
This article appeared in our May 2016 issue of The Actuary .
Click here to view this issue

You may also be interested in...

2

Meet the performing statistician

Sir David Spiegelhalter, eminent statistician and incoming president of the Royal Statistical Society, talks with Stephen Hyams about promoting a public understanding of risk and his aspirations for the statistical profession
Wednesday 4th May 2016
Open-access content
2

Will UK take the aye road or the no road in the EU referendum?

Martin Potter examines the implications of the EU referendum for Scotland and the future of UK financial services
Wednesday 4th May 2016
Open-access content
2

Decisions from the midst of uncertainty

Pete Naylor, an expert in decision risk analysis, talks to Cintia Cheong and Richard Purcell about the challenges of making business decisions in the oil and gas industry
Wednesday 4th May 2016
Open-access content
Micro

Hidden complexities

In the context of historically low interest rates and Solvency II, Richard Silveira discusses the challenges in developing ESG software to value liabilities and hedge interest rate exposure
Wednesday 4th May 2016
Open-access content
2

Pension freedom - is it enough?

Derek Steeden, Sally Rayment and Francis Chua suggest that inclusive projections will help people understand how their actions and ‘non-pension’ income streams will affect their standard of retirement
Tuesday 3rd May 2016
Open-access content
2

Actuary of the future: Sam Spink

Actuary of the future: Sam Spink
Monday 23rd May 2016
Open-access content

Latest from Life insurance

ytg

Seek cover

When it comes to sustaining your products’ performance in a ‘polycrisis’, customer engagement is key. Marco Spagnuolo outlines how life insurers can weather today’s economic storm
Wednesday 1st March 2023
Open-access content
67

Knock-on effects: the risks of cyber crime for life insurers

Life and health insurers need to consider how cyber risk could potentially impact them, say Visesh Gosrani, Mikhail Norshteyn and Karl Oliver
Wednesday 30th November 2022
Open-access content
tsj

On the write track: using machine learning to predict underwriting decisions

Yafei (Patricia) Wang looks at the use of machine learning to predict underwriting decisions for life and health insurance
Wednesday 3rd August 2022
Open-access content

Latest from Archive

2

De-risking too far?

Simon Willes explains why investment de-risking a pension scheme without regard to employer covenant may not lead to optimal member outcomes
Monday 9th September 2019
Open-access content
2

Financial services stand to gain most from low-carbon transition

The financial sector is set to gain most from creating new sustainable products and services in response to climate change, a groundbreaking international study has revealed.
Tuesday 4th June 2019
Open-access content
2

Government gives green light to pension dashboards in 2019

UK savers will soon be able to see all their pension savings in one place after the government today unveiled proposals for a series of dashboards that could come online later this year.
Thursday 4th April 2019
Open-access content

Latest from May 2016

FCA warns over 55s against investment scams

The Financial Conduct Authority (FCA) has warned older people to take care when chasing higher rates of return on their savings through dubious investments.
Friday 27th May 2016
Open-access content
brexit

Brexit could be a game-changer for asset risk

Risk exposures would change radically if the UK were to leave the European Union because larger companies’ earnings from the EU far outweigh those from the UK.That warning has come from Old Mutual Asset Management in its report Brexit: An Analysis of Economic Exposure.
Friday 27th May 2016
Open-access content
2

Survey shows personal investors in favour of Brexit

Independent UK retail stockbroker Share Centre says its customers still favour leaving the European Union but by a narrower margin than they did in February, its latest customer survey found.
Friday 27th May 2016
Open-access content

Latest from inline_image_missing_alt_text

TPR publishes coronavirus guidance

The Pensions Regulator (TPR) has published guidance to help UK pension trustees, employers and administrators deal with the financial and regulatory risks posed by coronavirus.
Monday 23rd March 2020
Open-access content
2

Bitcoin: In the vaults

Blockchain technology and the trading of bitcoin were introduced in October 2008 in the famous paper by Satoshi Nakamoto.
Wednesday 4th March 2020
Open-access content
web_p24_cat-and-fish_iStock-483454069.png

Sensitivity analysis: swimming lessons

Silvana Pesenti, Alberto Bettini, Pietro Millossovich and Andreas Tsanakas present their alternative approach to sensitivity analysis
Wednesday 4th March 2020
Open-access content

Latest from small_opening_image

2

COVID-19 forum for actuaries launched

A forum for actuaries has been launched to help the profession come together and learn how best to respond to the deadly coronavirus sweeping the world.
Wednesday 25th March 2020
Open-access content
2

Travel insurers expect record payouts this year

UK travel insurers expect to pay a record £275m to customers this year as coronavirus grounds flights across the world, the Association of British Insurers (ABI) has revealed.
Wednesday 25th March 2020
Open-access content
2

Grim economic forecasts made as countries lockdown

A sharp recession is imminent in the vast majority of developed and emerging economies as the deadly coronavirus forces businesses to shut down across the world.
Tuesday 24th March 2020
Open-access content

Latest from 05

Alternative longevity insurance

Caspar Young explains why longevity insurance transactions using a third-party segregated account cell company are more cost effective for a wider range of pension schemes than traditional approaches
Wednesday 18th May 2016
Open-access content
2

May the fourth be with you

Blockbusting action is all well and good, says Jessica Elkin, but when it comes to studying, a more predictable storyline is probably best
Wednesday 4th May 2016
Open-access content
2

Taming pension risk

Dan Mikulskis examines how changes in asset allocation have affected risk levels in UK pension schemes over the past decade and suggests what needs to be done in the future
Tuesday 3rd May 2016
Open-access content
Share
  • Twitter
  • Facebook
  • Linked in
  • Mail
  • Print

Latest Jobs

Exposure Management Analyst

London, England
£40000 - £50000 per annum
Reference
148639

Pricing - Casualty Actuary

London (Central)
£128K + bonus + benefits
Reference
148638

Reporting Contractor

Negotiable
Reference
148636
See all jobs »
 
 
 
 

Sign up to our newsletter

News, jobs and updates

Sign up

Subscribe to The Actuary

Receive the print edition straight to your door

Subscribe
Spread-iPad-slantB-june.png

Topics

  • Data Science
  • Investment
  • Risk & ERM
  • Pensions
  • Environment
  • Soft skills
  • General Insurance
  • Regulation Standards
  • Health care
  • Technology
  • Reinsurance
  • Global
  • Life insurance
​
FOLLOW US
The Actuary on LinkedIn
@TheActuaryMag on Twitter
Facebook: The Actuary Magazine
CONTACT US
The Actuary
Tel: (+44) 020 7880 6200
​

IFoA

About IFoA
Become an actuary
IFoA Events
About membership

Information

Privacy Policy
Terms & Conditions
Cookie Policy
Think Green

Get in touch

Contact us
Advertise with us
Subscribe to The Actuary Magazine
Contribute

The Actuary Jobs

Actuarial job search
Pensions jobs
General insurance jobs
Solvency II jobs

© 2023 The Actuary. The Actuary is published on behalf of the Institute and Faculty of Actuaries by Redactive Publishing Limited. All rights reserved. Reproduction of any part is not allowed without written permission.

Redactive Media Group Ltd, 71-75 Shelton Street, London WC2H 9JQ