The Development of Impaired Annuity Markets in the UK and elsewhere

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2 The Development of Impaired Annuity Markets in the UK and elsewhere Insuring the Health of an Ageing Population November 2013, Zurich Peter Banthorpe, Head of UK Research and Development November 18, 2013

3 Table of Contents and Time Distribution Questions / Discussion 1. Introduction 5. Closing Remarks 2. UK Market Overview 4. International Context 3. Pricing and Underwriting 2

4 UK Market Overview Identifying Demand Side Factors for Success 3

5 Significant accrued private pension funds exist Gold Standard: Defined Benefit (DB) schemes Membership in decline, especially from late 90 s Replaced with Defined contribution schemes Personal Pensions and Group Personal Pensions available from the 1980s Proportion of employees with Workplace pensions Source: Annual Survey of Hours and Earnings (ASHE) 2500 Total Retirement Benefit Funds held in Life and Pension Schemes in real terms, bn Non-Insurance Insuer: Individual Insurer: Occupational Source: ABI (2011) 4

6 High Tendency to Purchase an Annuity at Retirement Historically a legal requirement: can retire between 55 and 75, you must buy an annuity by age 75 No longer the case since April More options now especially with Income Drawdown and also fixed term annuities. The level of public trust and confidence in providers of annuity products Professional intermediaries 5

7 Shopping around for Best Value actively encouraged Since 2002, requirement on pension providers to disclose right to shop around. ABI Code of Conduct came into effect on 1 March 2013 Mandatory code Provider now has to make clear that they may not offer the best annuity product or rate, as well as declaring whether they offer an enhanced annuity. Unless a customer has specifically asked for one, an application form will no longer be automatically included in the pack FCA Thematic Review during 2013 ABI Annuity Window August

8 Underwritten Annuities Emerge from 1995 In competition with conventional annuities No health assessment Market started in 1995 Stalwart Assurance with smoker annuities PAFs with impaired life annuities Many more market entrants since then. Around 13 right now. Total Annuity Market in 2012 = 14bn Underwritten Annuities = 4bn Sales in Billions of Underwritten Annuities Source: Towers Watson 7

9 Annuity Products in the UK Market: Current View Underwritten Pension Annuity Market Underwritten Wide range of risk factors High level of automation Wide range of additions Increasing sophistication 8

10 Annuity Products in the UK Market: Current View Underwritten Pension Annuity Market Immediate Needs Differing Tax Treatments Underwritten Wide range of risk factors High level of automation Wide range of additions Increasing sophistication Immediate Needs Very Serious cases High enhancements Medical evidence Human intervention Slow and costly 9

11 Immediate Needs Annuities: Market Size m Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q Source : ABI Individual Market 10

12 Demand Side Success factors Annuities Summary Significant accrued private pension funds Appetite (or compulsion) to transfer longevity and investment risk in a long term insurance product No limitations or penalties for moving providers 11

13 Overview of Pricing and Underwriting Approaches Developing Supply Side Factors For Success 12

14 Mortality Assumptions Needed Current/Base Mortality Rates Future change in mortality rates Needed for any annuity product But how do these change for people with specific impairments? Shape and level of mortality change How accurately can you reflect this: Availability of data to parameterise Systems flexibility Expressed as relative to control group or impairment specific tables? How granular do you want to be? Competitive considerations How do you group impairments? What about multi-morbidities? 13

15 Shape and Level of Mortality Change Survivor Curve Loadings Comparison - Colorectal Cancer - Duration Normal Mortality Relative Survivor Actual Equivalent Weibull Equivalent Flat per mille 14

16 Competitive considerations for granularity M60, Colorectal cancer, 100,000, no escalation or guarantee, paid monthly Company None Local Lymph Spread A - 7,560 7,560 7,560 B - 7,170 7,517 8,127 C 6,279 6,980 7,394 8,113 D - 6,503 6,503 6,503 15

17 Complexity of Multi-morbidities Nexus of CAD Disclosures in a Specific Portfolio Proportion of applications with disclosures from shown disclosures only (78% of all applications in this case) (Empty cells mean <0.5%) 12% 13% Smoking Other CV Risk Factors 29% 2% 2% 1% Diabetes 17% 3% 16% Coronary Artery Disease 2% 2% 16

18 Allowing for Past and Short-Term Future Trends Source: Buch P et al, Heart Feb;93(2): Epub 2006 Aug 29 17

19 Researching Impairment Loadings As per any evidence based underwriting manual. Key challenges: Finding studies focused on older ages Relative risk factors expressed relative to otherwise healthy group Correctly controlled for co-morbidities Interpreting different metrics Reflecting current clinical practice Long follow up periods Country and socio-economic specific Allowances for comorbidities key Significant uncertainty here on how to combine different ratings Akin to emerging research area of prognosis research PROGgnosis RESearch Strategy (PROGRESS) Partnership (BMJ, PLOS 2013) Analysis of databases of electronic health records enhances quality of work 18

20 Supply Side Success factors Annuities Summary Is the market correctly pricing longevity risk? The availability of technical information To analyze past experience and derive future mortality improvements Pricing and product design freedom or limitations Is underwriting permitted in the country? Realistic reserving bases Availability of appropriate investments 19

21 International Context 20

22 Where Next for Underwritten Annuities? Underwritten Annuity market really only exists in the UK. One provider in South Africa Smoking Annuities tried and withdrawn in the Netherlands Immediate Needs Care Annuities also largely a UK only product One or more specific barriers exist in other countries. Those with the lowest barriers would seem to be: Annuities are brought and sold but longevity currently underpriced e.g. Netherlands Where regulatory changes would remove barriers e.g. Mexico Where there are plenty of accrued funds but also lots of flexibility in how to use them e.g. USA 21

23 Closing Remarks Future Developments 22

24 Summary Underwritten Annuities are now a substantial portion of the UK at retirement market place They are seen as delivering better, fairer value to those people in poor health Specific market conditions have benefitted the product in the UK but we see other markets where these products have potential Correctly pricing and underwriting these products is very challenging and data availability is key To date Immediate Needs Annuities have been a very small distinct market but commonalities do exist 23

25 Future Path for the UK Market Place* All annuities being underwritten Annuities increasingly poor value for healthy lives Annuitisation likely to be delayed until later into life / following a health event Particularly for those larger fund sizes / more financially sophisticated; Drawdown with conservative investment strategy can be used to mitigate investment risk; Limited genuine longevity risk at retirement ages Underwriting of specific conditions likely to become more sophisticated market becomes more competitive Medical science becomes more specific e.g. genetics Inclusion of Psychosocial elements into the underwriting assessment 24

26 Thank you for your attention. 25

27 The Common Application Form: Underwritten Annuities Personal Information Smoking Information Specific Questionnaires for: Heart Conditions Diabetes Cancer, leukaemia etc Stroke Respiratory / Lung disease Multiple Sclerosis Neurological Disease Activities of Daily Living General Questionnaire for up to 3 more conditions No medical evidence requested, except post issuance disclosure checking 26

28 The Common Application Form: Immediate Needs Annuities Personal Information Care Details Locations Entry into First needed Doctors Details Medical History Hospital Attendance Falls Memory loss / Dementia Major medical conditions Activities of daily living 27