Compared to pre-funded LTC, immediate needs annuities are seeing healthy sales. However, new advisers to the market should apply caution, says Paul Robertson
The immediate needs annuities market is a niche within a niche. Few IFAs have any great experience in the funding of long term care (LTC); even fewer are experienced in the funding of immediate needs LTC.
Market statistics bear this out. The Association of British Insurers collates statistics showing in 2002 only 1,378 policies were sold, to a value of £68.7m. Figures for the first half of this year show a slight upturn, with 700 policies, at a value of £40.7m, sold. This continues the gentle increase we have seen in the value of the market over the past few years.
Dean Critchfield, retirement marketing manager at Norwich Union, points out only £43m worth of policies were sold in 2000, and £54m in 2001.
"The numbers may remain small, but we are looking at a market that is growing at around 20% a year. This is a vibrant market," he says.
Definite growth
In common with many other financial services aimed predominantly at the elderly, the market can hardly fail to grow. With a demographic shift towards an older population, and rules that say you cannot own more than £19,500 and have free care, growth is inevitable. The majority of people own a property, the UK is a house-owning nation, so many people will have to look into paying for LTC themselves. A proportion will find themselves in the immediate needs category.
Apart from low overall sales volumes, at the moment, the market is remarkably small in the number of providers. There are just five providers in the market, Norwich Union (NU), AXA, GE Life, the Pensions Annuity Friendly Society (PAFS) and BUPA. PAFS stands out in the group as it is the smallest, but it maintains competitiveness because it is a specialist in this market.
When it comes to differentiating the products, nearly all choice is based on price. Critchfield says: "There is not a huge amount of difference in what policies provide in terms of core provision in this market. It is more that each individual is treated separately and each company will give their opinion on the client's chances of longevity, so there will be differences in price."
The last gap between the terms offered by different providers was closed recently when PAFS added capital protection to its annuities, meaning some capital is returned in the event of early death.
Ben Nightingale, marketing director at the PAFS, says: "Before this we were the only company out of the five not offering any form of capital guarantee, so in terms of bells and whistles we are all the same now."
However, market outsiders would be surprised to see just how big price swings between providers can get. Owain Wright, head of care funding specialists The Care Funding Bureau, explains: "When we have a client and think an annuity might be the answer, terms can vary enormously from provider to provider, even when the companies are sharing the same medical information from the same form."
He cites an example a few weeks ago when his firm had one provider asking for a premium of £144,000 and with exactly the same client, and exactly the same medical information, another provider asked for £42,000.
"I am not an actuary, and I am sure they could explain this to me several times, but it boils down to us having to go to all the providers all the time. It is lucky there are only five," says Wright.
It is the differences in underwriting that result in these variations, as Nightingale explains: "Each company underwrites their policies slightly differently. PAFS uses a points scoring system. We have a simple two-sided questionnaire, which is filled in by the doctor or the attending nurse of a care home and from that a point score is generated.
"The higher the point score, the shorter the life expectancy. I think other companies rely on a medical report from a GP, which can lead to differences in price."
Comparing PAFS' methods with those of NU highlights the differences. "NU receives the report which is then sent to our underwriters, who give an opinion based on their experience.
"There is also the reinsurers' involvement, who will look at the case before the quote is released. Our underwriters give an opinion, but it is the reinsurers who make the final decision," says Critchfield.
There are further complications in cases where someone has a longer life expectancy, for example, someone who is in a residential care home, as opposed to a nursing home. These cases can involve subjective decisions, such as if Alzheimer's is diagnosed. These clients can be difficult to rate and underwrite, as someone with Alzheimer's can have quite a long life expectancy.
As a rule of thumb, however, Wright estimates the average cost of an immediate needs annuity is four times' the annual benefit you are asking for. This is for the average client, which would be aged in their mid to late 80s, with some health problems.
So is this a market the average IFA in the street should be looking at? According to Nightingale, it has massive potential, but there is a need to specialise.
"This has probably led to the market not expanding as rapidly as some thought it had the potential to do. IFAs need to know what they are talking about; otherwise they will leave themselves open to accusations of mis-selling. There are many situations whereby a person could have their care paid for them," he says.
This opinion is heavily reinforced by Wright. He says: "I have to say I think this will become a growth area, particularly when long term care insurance becomes regulated in 2004. To be honest, there is room for IFAs to grow into this market, but clients will not simply come along and say 'I want an immediate needs annuity,' they will present a set of circumstances that will need definite advice. You will get from client's questions on anything from Attendance Allowance and Registered Nursing Care Contributions to more complex issue such as shared beneficial ownership and continuing care.
"The point is that some of these issues are the difference between a client paying for care and not paying for care. If an IFA sells someone an annuity when there was an opportunity to not have to pay for care in the first place, then they leave themselves open to trouble."
So a certain amount of training is probably wise for any IFAs thinking of entering this market. There is a body of necessary knowledge and it is worthwhile ensuring you know it before you take the leap. Wright pointed out a few of the providers - NU, BUPA and AXA were singled out - will provide training courses to a certain level.
Nightingale adds: "IFACare - the organisation for IFAs specialising in long term care funding - is an excellent organisation. It does a lot to educate IFAs, and also acts as an umbrella group for IFAs in the care sector. So any IFA entering this market could do a lot worse than to get in touch with them."
For an IFA with an immediate needs case walking into their office, the option remains of going to a specialist and having them source the right product on your behalf. As an example, the Care Funding Bureau offers standard term fees of 25%, increasing depending on the quantity of business. If the case turns out not to warrant an annuity, the original IFA is contacted and the case is returned to them.
Future involvement
So what of the future? This is a quiet sector and the necessary diligence results in few market movements. There are no insurers currently poised to enter the market with new products.
Critchfield says: "As a provider in this market it is a case of getting some experience, getting involved in the reinsurance aspects of the market and having the capacity to deal with the business. I still see few providers in the future, more as a case of companies having other priorities rather than anything else, but any newcomers would tend to be the larger-sized firms due to the nature of the business."
From a regulation angle, apart from the impending Financial Services Authority regulation in 2004, there have been a few announcements from the Health Services Ombudsman in the past few months that will have an impact on the immediate care market in general. One was on continuing care, which meant if someone was ill enough and needed extensive nursing, then they could get their care for free. Second, those who are a danger to themselves, or others, in a care home and are sectioned under the Mental Health Act, can also claim their care for free.
As an example of how complex the subject can be, even for the authorities, the Ombudsman has also said some local authorities and health authorities have been charging people for their care when they ought not to have been, and has ordered they these authorities start making compensation payments. However, with a cautious approach, there is no reason why more advisers should not be benefiting from this market.
Cover notes
• The immediate needs market is growing at 20% a year and has huge potential.
• Varying underwriting methods result in huge premium variation between providers.
• Brokers need specialist knowledge before tackling the market.
