Nick Flynn discusses how recent underwriting innovations have affected the annuity industry
Without doubt, recent improvements in technology and the introduction of online quotations have dramatically improved the efficiency of advising on annuities. Nonetheless, the impact of portals and XML technology has been markedly less significant on quotations for enhanced and impaired annuities. The challenges raised for advisers and providers, as well as the expectation of even greater complexity in the future, pose important questions around how 'at retirement' advice and products might best be delivered going forward.
While most providers accept medical evidence via one of the common medical forms, the underwriting systems and requirements differ. Some have online systems, while others take a more manual and traditional underwriting approach. Either way, the forms work reasonably effectively and grant the same information to all providers, as well as ensuring both the client and adviser need only complete one form.
Although hardly cutting edge, this is a vast improvement on the previous systems and is likely to indicate at least the direction of progress in the short term. Full automation does seem very unlikely in the near future and it is more probable that some aggressive players will develop their own systems.
Many providers already make online quotation engines available on their websites. Telephone underwriting systems also offer several benefits to the adviser as they can simply tell their client to expect a call from an underwriter to clarify their medical history. The experience to date of such services has been positive - on a number of cases the rates have improved significantly - but this cannot be replicated by all providers. Subjecting a client to ten underwriter calls would be a giant step in the wrong direction and simply reduce the numbers pursuing the open market option.
Other providers simply quote on the information available and still others require a doctor's report. While this adds a further step and delay to the process, it can improve the rates. Naturally, all advisers would attempt to get the best possible rate, but waiting for GP reports can also cause problems, especially when faced with volatile market conditions, falling annuity rates and clients who simply want their pension and lump sum.
Ultimately though, innovation is to be both welcomed and expected, especially as this segment of the market is becoming so popular and attractive to the providers. So, what is the next realistic step?
For those with complex medical histories, the traditional underwriting processes will remain, but for the lifestyle and smoker type clients, online systems and portals will develop even further. This is already evident among the providers offering postcode and smoker-based annuity rates. While the postcode-based annuity rates grabbed the headlines for a short period, the differential in rates was initially small.
However, in recent months, the differences have increased, with one of our recent clients receiving a postcode-based rate that was higher than a low-level enhancement.
With new products, providers and rates moving frequently, advisers need to focus on this business to be sure of securing and maintaining the best rates available. For standard conventional annuities, using a portal is a fairly safe bet. But, with double the number of providers competing in the enhanced annuity market, each working in a slightly different way, it starts becoming an adviser's nightmare. Getting it wrong can be very expensive - how will a client feel if they find out the adviser missed the top rate available, not to mention the compliance director or regulator?
It is no secret that numerous specialist 'at retirement' businesses or teams have been established over the last 10 years, many of these are now well known brands. Vested interests aside, I believe strongly that clients are best served by organisations which either do enough of this work to create a specialist resource, or outsource to a third party which does. Retirement specialists are likely to get better terms and service standards than non-specialist advisers and will frequently offer compelling incentives to make referrals. Providing trust can be quickly established and agreements put in place, this should create a win-win situation for all concerned, most importantly the client.
Creating an in-house team is a popular solution, but a significant investment in the technology and infrastructure is required. Many firms simply do not have the time, or funding to make this work, especially in these challenging times.
The annuity market was a small, sleepy part of the financial services industry, largely overlooked by the masses, playing second fiddle to other markets. But the 'at retirement' market is now expanding fast. With over 400,000 annuities established last year, the demographics are such that this market will continue to grow dramatically over the next 10 years. Not only will it grow, but it will become more complex as new products and providers enter the retirement income arena. The challenge, to both advisers and providers, is to create technical solutions and tools which can support this growth, while further enhancing transparency and efficiency.
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