Fiona Murphy asks what the increasing move to underwritten annuities will mean for the market
Research by Xafinity has revealed 60% of annuity providers and industry experts believe healthy lives are being disadvantaged as personal underwriting of annuities becomes every-day practice. After all, the benefits of cross-subsidy across a wide population base will disappear, meaning premiums could soar for those in good health.
But the shift to personalised underwriting is surely a positive step for the annuity market. But what could the unintended consequences be?
So how do enhanced lives price out the healthy? Vince Smith Hughes, head of business development at Prudential explains: "The more people you take out of the annuity pool, the more unhealthy lives you take out of the annuity pool, the worse it remains for people in it.
"So, you're right - it's good for those people who can get a good enhancement although the fundamentals of low yields on gilts and bonds [will equally] hit them. For the people left in the pool who are the healthy people - they're obviously going to be getting a worse deal than everybody else and I suspect some of those people will turn to alternative type arrangements."
Is it a fairer system?
Despite these issues, many quarters imagine the change to the annuity market with more accurate underwriting capabilities, will produce a fairer system.
Timothy Gosden, head of annuity product development at Legal and General says: "The expectation may be from people ‘I'm going to get a lot less' but actually you're getting what you should get. Arguably the way the system is at the moment with standard annuities is you're getting poorer people cross-subsidising the unhealthy."
Alan Higham, managing director of Retirement Angels agrees: "They will better and more accurately price a pension so there will be less difference between healthy and unhealthy lives. [There will be] more distinct pools of people who have more similar types of risk to each-other." He compares the shift to how we go through the car insurance process or how contents insurance underwriting has changed over time.
Xafinity's survey participants were split into two camps. Brian Please, business development manager of insurance at Xafinity says: "Those who said people are being priced what they deserve [while] the others said we're losing the basic principle of shared risk within an insurance product."
The research also highlighted a related area for concern. Xafinity questioned survey participants as to whether the rapid increase in interest in enhanced annuities would mean there was a possibility of false or non-disclosure at annuity purchase time. This could lead to insurers accumulating a long-term capital problem.
Please said this is not a problem at the moment: "People instinctively do not want to disclose all of their medical conditions to an adviser. If you were taking out protection style cover, it would work against you because you would be charged high premiums. I don't think customers understand the more information they give, the more chance they have of having an enhanced annuity. It feels to me more like its under-disclosure at the moment."
But he also says the chance of over-disclosure or false claims could become more common as enhanced annuities become the norm. After all, an enhanced annuity is a one-off purchase. People cannot be penalised if they live longer than expected, whereas in the protection market, people can be penalised for not disclosing long-term medical conditions for a claim.
With the removal of gender as a factor and ever spiralling annuity rates, the move to individual underwriting can only be a good thing.
And with the open market option coming into play next year, people will be more likely make active choices at retirement.
But how the market adapts to some of the unintended consequences could be a real challenge down the line.
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