Clive Bolton talks to Helen Morrissey about the issues currently affecting the market and debate around open market options
The enhanced annuity market has enjoyed real growth this year - how can you see the market developing?
As the individual annuity market matures, the stark difference between the standard and enhanced products will disappear. Instead of having a separate, individually underwritten process for customers with medical conditions those with uncomplicated health issues will follow the same automatic process as healthy customers. This will be an extension of the developments we have seen this year with the introduction of mandatory postcode and smoker status in the portal based quotation systems. Ailments such as body mass index, high blood pressure and high cholesterol would be accommodated in the automatic process but those customers with serious conditions or ones which require more information to assess will need to be case underwritten.
A number of industries have evolved in this way, for example you can draw comparisons with such things as motor insurance quotes. In the past, if you drove a large engined car or had more than a certain number of points on your license then your broker would need to contact an underwriter to get a quote. However, now you can get a computer calculated policy for all but the most extreme cases. In our market this process has now begun and I think we will see a rapid development of computer quotes especially as the advantages of speed and consistency become apparent.
How will the extra information be used and how will it affect the advice process for annuities?
In addition to the advances in enhanced annuities we are starting to move away from the situation where all healthy people are assumed to have the same lifespan to one where a range of factors are considered. From an actuarial perspective, this is new territory and requires investment in research combining medical, social and lifestyle information. As a result, Norwich Union has recently announced its sponsorship of the Aviva Chair in Insurance Statistics at the University of East Anglia to focus on areas such as these.
Regarding the advice process, while you would think that the process of collecting more information would result in more work for the adviser it usually requires information that is probably already known such as postcode. However the age of the quick quote is probably over as it is no longer tailored to the customer's situation. The real challenge that we will face is in ensuring that the information which we collect is correct. In standard annuities we now take into account lifestyle factors so we have to put measures in place to ensure the information we receive is correct. This is an issue familiar to other parts of the financial services industry, and I would expect to see an increased use of validation with third party agencies and spot checks on customer details.
Given the statistics on how many people could potentially qualify for an enhanced annuity, why do so many go for level annuities? Is it down to inertia, lack of understanding by the adviser or is it because the pots are too small?
Despite all the work we've done to highlight the options that customers have when retiring, such as open market option (OMO) or enhanced annuities, a lot of people still don't use them. However, as people become more aware of the open market option and start to realise they could receive a better pension then they will become more confident about actually using it.
Also there are a lot of small pots out there and the cost of processing a transaction on the open market can be an inhibiting factor. It is especially important as this segment of the market is likely to increase over the next few years as increasingly customers' pension arrangements are fragmented. Providers will have to work closely with advisers to ensure these processes are as cost effective as possible and I think the current thinking around annuity warehousing solutions is a positive step.
Many providers have come under fire over the quality of their literature and service. Would a compulsory OMO encourage them to raise service standards or would they be left struggling to cope?
I do not think compulsory OMO is the answer. Norwich Union does all it can to provide a competitive quote to both internal and external customers. We are the only major insurer to automatically provide internal customers with illustrations based on lifestyle factors such as postcode, martial and smoker status.
One thing we need to address as an industry is how to move funds in the most efficient way. We are both a sender and receiver of these funds, and while we have processes in place to deal with this, we know that other providers do not process these transactions as quickly as they should. These practices are damaging to the industry's reputation and we have to work together to sort this out. There are industry initiatives to try to tighten things up, but to be honest; the people who take part tend to be those who are committed to providing a good service anyway and the solution must include all providers. We need to get our act together to improve things before the regulator gets involved and compels us to do so.
What do you think should be the industry's main focus over the next few years?
I think we have a real opportunity to serve our customers better. The number of people retiring is set to increase rapidly, and the current economic conditions mean that getting a good deal is more important than ever before. The key is making retirement easier to understand, and providing customers with access to the information and advice that they need.
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