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02

Medical underwriting increasingly popular buy-in option, says Towers Watson

Open-access content Wednesday 26th February 2014 — updated 5.13pm, Wednesday 29th April 2020

Medical underwriting in buy-ins is gathering pace and could soon be the only option available for smaller defined benefit schemes, actuaries Towers Watson have claimed.

Its monthly settlement watch, published yesterday, looks at the movement in the pricing of bulk annuities and provides an update of recent buy-in, buy-out and longevity swap transactions. This month's update highlights that the end of 2013 and the start of 2014 saw a significant increase in activity in medically underwritten buy-ins with four transactions announced so far this year, including the largest to date at £33m.

A buy-in, also known as a bulk annuity, takes the form of an insurance policy covering benefits for a selection on pensioners. However, not all of the scheme's risk is passed over, which means trustees have to then decide which member risks will be passed on and which will be retained.

Will Griffiths, medical underwriting specialist at Towers Watson, said: 'As these transactions become more mainstream, trustees are becoming increasingly open to using this approach. The importance of medical underwriting for schemes with less than £50m is further highlighted by Rothesay Life's purchase of MetLife last week, removing one of the insurers who remained willing to quote a non-underwritten basis for smaller bulk annuity contracts.

'It may soon be the case that for smaller schemes the only option available will be medical underwriting.'

He added that the market had developed significantly over the past couple of months to deal with trustees' concerns around members being asked to provide medical information several times if a competitive, multiple insurer process is being run.

'Now a common approach has been agreed so that members are only contacted once and their responses are made available equally between all the insurers quoting,' said Griffiths.

He added that members had been more co-operative with requests for medical information than expected. On average, more than 70% of scheme members had complied with requests for medical information, and in some cases all members responded.

'The risk that medical underwriting leads to an increase in price still remains, but is partly mitigated by keen pricing from the insurers as they try to establish market share, ' Griffths continued.

'Insurers are also willing to provide an indicative cost of the scenario in which all members are classed as healthy, allowing the trustees to understand the potential downside of following the medical underwriting path.'

 

This article appeared in our February 2014 issue of The Actuary.
Click here to view this issue
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