After travelling the globe we return home to consider one of the rising stars of recent times: underwritten annuities. Greg Becker investigates aspects the wider market could emulate.
Underwritten annuities are a type of annuity where medical and lifestyle evidence is taken into consideration at the time the product is purchased. They aim to target lives which have a below average life expectancy, and to use this shortened life expectancy to offer a higher annuity payment. Products issued as underwritten annuities run the gamut from the impaired annuity market to the enhanced annuity market.
In the case of the impaired annuity market, qualification for a product is contingent on the customer suffering from, or undergoing treatment for, a particular medical condition (such as cancer) which can be shown to have a proven link with increased mortality. Under these circumstances, the mortality loadings are significant.
In the case of enhanced annuities, the mortality rating can be based on lifestyle factors, such as smoking or obesity, rather than a life-threatening condition. For this reason, the mortality loadings – and thus annuity enhancements – are smaller than those used for impaired annuities.
Due to the differences in the uplift, the amount that can be invested in underwriting the case varies, and many enhanced annuities rely on standard loadings if simple quantitative criteria is met.
The product line began in 1995, and sales have risen dramatically every year. More and more funds have been annuitised in absolute numbers in recent years due to a combination of factors, not least of which the baby boomers hitting retirement age, the rise of private defined contribution pension saving arrangements in recent years and increasing asset prices.
Many believe all annuities will soon be some kind of underwritten annuity. At present almost 60% of annuity premiums that were used to purchase an annuity on the open market purchased an underwritten annuity.
Of course, it is important to interpret statistics carefully, especially considering those who are sick and/or have larger annuity pots (with more to gain from trying to qualify for an uplift due to an impairment) are more likely to shop around. This is supported by evidence showing those that do not shop around purchase a standard annuity in more than nine out of ten cases.
In this series we have always written about success stories from around the world, and this is certainly a UK success story – a UK gold medallist if you will. Some may wonder why we are looking at the UK and not internationally, and the reason is simple: we can learn from the industry wide steps that contributed to the rapid growth of this product line, and hopefully replicate them.
