After a slow start, interest is increasing in the impaired life market with many of the industry's big names now challenging the products being offered by niche players
The impaired life annuity market has taken time to grow since the first products emerged in the mid-1980s.
This slow growth is perhaps surprising considering the higher income payouts available on impaired life products but it reflects the lack of understanding of annuities and the open market option
Equally, many of the largest providers and best known brand names have been reluctant to provide impaired life options in the past as they were wary of upsetting the market for their traditional annuity products.
Providers balance their annuity payments through a mixed pool of healthy and unhealthy annuitants. The latter would be those suffering specific medical conditions, such as diabetes, or people who are overweight or smoke. The annuitants who die young cross-subsidise those who live longer. Providing better rates for those expected to die younger upsets this balance.
'People spend all their life building up a pension fund yet there seems to be a lot of ignorance in terms of what happens when they get to retirement,' says David Evans, managing director of GE Life, the company which bought Stalwart Assurance, the first provider of a smoker's annuity in the UK.
'It is a growing market in terms of people recognising that they should be maximising the opportunity to get a better rate. We're saying for someone who has some form of ill health why not allow us to take medical evidence and on the basis of that quote a rate which may be significantly in advance of the standard rate.'
While higher rates are good news for those with impaired lives, it is potentially bad news for those healthy lives left, not only are they likely to live longer but gilt yields are coming down.
As a result providers may have to reduce their rates accordingly for the good lives because they are lasting that much longer and are not being cross subsidised by those who might die earlier.
Far more worrying perhaps for insurers is the risk that unhealthy annuitants may not be as unhealthy as they seem. Or if they are, they could still live for a very long time. Unforseen medical developments could leave annuity providers stuck with paying out higher rates to people who are now going to survive longer than originally anticipated when their annuity was granted and guaranteed.
Gradually, however more pension providers have started to offer impaired life rates regardless of the impact it may have on their main annuity book.
'The impaired market has grown,' says David Marlow, head of marketing at The Annuity Bureau. 'One of the best indicators of this is that some of the traditional major providers, for example Prudential and Norwich Union, who when these products were first launched probably viewed it as a small niche area are now both underwriting impaired life annuities, if not smoker rates. That shows the big players cannot ignore the market any longer.'
Key providers in the market for impaired life annuities include Britannic Retirement Solutions, GE Life, Prudential, Norwich Union, Scottish Widows and the Pension Annuity Friendly Society. British Life and Britannic Retirement Solutions also offer smoker rates.
The impaired life market is increasingly buoyant as providers rate and pay for market share. The variation in income payable is greater with niche than with standard providers.
'You may have one underwriter who feels that a particular medical condition will have a big impact on life expectancy and another underwriter that takes a different view and you can end up with quite a variation available,' says Marlow.
'Standard annuities are not underwritten at all and are just rate driven depending on your age and the type of annuity you want,' says Evans, 'An impaired annuity is much more bespoke because the severity of someone's condition will affect just how much that enhancement will be.'
While there is a greater emphasis on specialist underwriting not every provider uses the same calculation methods to identify risk.
Some use a system whereby they calculate a specific life expectancy, others actuarially assume the individual is older than they are because of their impairment. So for example if the individual were age 60 and had cancer of the colon, the annuity provider might actually assume they were 68 and calculate the life expectancy on that basis. Impaired clients should also be aware that arranging their annuity may take longer because the provider will need information from their GP or hospital specialist.
Evans agrees insurers are constantly looking at the data and trying to identify ways in which they can assess the impact different conditions have on people.
'We may see greater segmentation in the future because everybody is in effect underwritten individually,' says Marlow. 'At the moment we are not that far down the line, the majority of people are entering into a very large risk pool because although the impaired life market has grown, it's still a relatively small part of the overall market.'
In terms of the offerings on the market, essentially the products are the same for impaired life annuitants as for more standard retirees. The difference is in the higher rate applied.
The table above shows the gross income an annuitant would receive, based on a £100,000 investment. The impaired life annuity income is based on the rate applied to a person who has had a triple heart bypass in the past year. A healthy male aged 60 would receive £6,887 from the Prudential but his impaired life counterpart would receive £7,960 from GE Life. On the same basis a healthy female could get £6,505 from Legal & General while an impaired life female would be able to get £7,397, again from GE Life.
'But advisers should be shopping around because companies will offer different capabilities,' says Evans. 'There are some annuities around where we don't take medical evidence but apply an across the market enhancement because of the condition.
'There are other products which will sit somewhere between a standard annuity and an impaired life annuity and sometimes people won't be bothered to produce the extra medical evidence because they can still get a good rate from these providers. In effect you're trying to maximise your annuity for the minor inconvenience of having to provide medical information.'
While the impaired life market is growing there is no evidence as yet that it is having an impact on conventional annuity rates. Annuity rates are at an all time low but so are interest rates so the real rate of return is probably not as dire as people seem to think, says Evans. He adds: 'It seems sensible that people try to maximise their retirement income and if they do have some form of ill health why not see if they can get an improved rate?'
Impaired life annuity market growing.
Providers are now both niche and mainstream players.
Too big an impaired life market could bring down rates on mainstream products.
Providers face risk that impaired lives might live longer than expected.
More specialised underwriting is required for impaired life product.
Doctor's or specialist's report might be needed before impaired life product can be bought.
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