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.
The story of the rise of the underwritten annuity has many milestones, the most notable leading to streamlining and automation of the application process, including the introduction of the common quote request form.
This form enables the broker to complete a single application form to get quotes from many providers using minimal marginal effort. Prior to this collaborative industry effort, a broker would have to complete a single bespoke form for each annuity provider – raising the cost of obtaining a quote.
Virtuous circle
This simple process improvement increased efficiency allowing for multiple quotes, more pension pots to become underwritten annuity candidates and a more efficient retirement income market. With more annuities being underwritten and a greater percentage being offered an uplift, a virtuous circle began as standard annuity rates declined with more and more standing to gain from an underwritten annuity.
The impaired annuity industry is continuing this path of process improvements, with the latest example being the imminent introduction of Origo 3.7 which will enable many enhanced annuity applications to be electronically underwritten in real time.
With the steady stream of new impaired annuity providers and the focus on the open market option by regulators and trade bodies, to help ensure that people who could qualify receive the opportunity, the market is set for record sales.
The market has prospered despite record low interest rates and the lifting of, or partial removal of, compulsory annuitisation. The future use of technology will help to get more sales over the line, as will the search for rating factors to replace gender. It could be easily argued impaired annuities are not a new product line, but rather a successful cannibal munching through the existing annuity pie.
Many comment on the need for industry players ‘to focus on growing the pie rather than fighting over their share of the pie’. Fewer annuities would almost certainly have been sold if impaired annuities were not developed, begging the question whether industry evolution is a pre-requisite for long term growth.
Are our existing products too complex and alienating certain customer segments? What should the future be for simple products that meet customer needs? Should simple income protection (IP) cannibalise IP sales and in the process help grow the IP market? Should a new wave of simple trauma products overrun more complex critical illness (CI) products with ABI+ definitions?
Whatever the answers, we should learn from the growth of impaired annuities.
Greg Becker is product development actuary at RGA
