Designing Your Underwritten Annuities
How will the underwritten annuity market look in the future? Nick Colton
The market is not going away! 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 www.towerswatson.com/united-kingdom/press/7886 Bigger, richer aging market Pensions in DC schemes More financially sophisticated TCF and clear communication Media coverage On the portals Gender legislation IFA compliance risk 4
RDR Time is money Morally the right thing TCF/ABI Code/Compliance IFA Professionalism Small pension pots Develop efficient, customer facing systems and processes Then use the MI ORIGO 3.7 More questions, more accurate faster quotes 5
What does this mean for underwriters? Issues Quicker, Guaranteed, No IFA More insurers and reinsurers enter as the market grows Competition as more companies enter the market Gender Directive Consequences Impact on disclosure Need to build efficient processes They may ask different questions They may have different philosophy They may offer different impairments They may have rating criteria Pressure on ratings Pressure to offer minor impairments Pressure to relax requirements New rating factors 6
What is the long-term solution? Underwrite accurately Reliable, good quality, robust research Appropriate questions objective, easy to understand, good measure of risk Granular, accurate ratings to minimise selection risk Improve risk management practices Collecting the right requirements Processes for deaths Monitoring IFA quality Efficiency Distribution Underwriting Capital Collecting good quality, reliable data, using it sensibly and dare I say even talking to actuaries! 7
at retirement Are there new product opportunities in this market? ^ Greg Becker
Are there new product opportunities in this market? The easy answer: YES NO 9
Are there new product opportunities in this market? The easy answer: Gender directive Origo 3.7 Automated underwriting YES RDR may find in favour Single premium longevity tail risk products in N America. 10
Are there new product opportunities in this market? The easy answer: Many of the areas were there is potential are crowded in regulatory uncertainty Not many have much money Private sector solutions need customers who have money for premiums and will buy NO 11
Wealth Who has money for premiums? Property Equity Release Top-up Disability Insurance Linked Annuities Immediate Needs Annuities Self Funding Equity Release Government s LTC plan a blessing in disguise? Pension DLA s: Disability Linked Annuities Other Not many have meaningful amounts of cash Income Those with meaningful amounts of cash often don t have to purchase tail risk protectors 12
Wealth Equity release For those who can t show you the money, but can show a house! Reuse of core competencies Equity Release Annuity and equity release have complimentary cashflow profiles Large source of wealth for many An alternative to selling and renting Income 13
Wealth Immediate needs annuities Limits catastrophic losses Immediate Needs Annuities Provides some certainty Useful for providers who offer a service to ensure payment Self Funding Premium falls due to age at entry and underwriting information Less opportunity for medical advancement Income In combination with equity release? 14
Wealth DLA s disability linked annuities Sold in France, Germany, Japan, Singapore Will selling them with Dilnot uncertainty be a mis-selling risk? Disability Linked Annuities You can get your product approved here: Income http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm09101710.htm http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm09101730.htm 15
Wealth Top-up insurance Topping up what? Don t ask Dilnot Don t ask Cameron Top-up Insurance Ask the spending review Income 16
Dilnot and the future of LTC? An unintended casualty of the Euro crisis? Discussions happened, proposals made, most in Government have said they like Dilnot s proposals, but must be looked at as part of the spending review The spending review is the Government ensuring that spending is sustainable The benefit of this spending review is that the markets like the UK, and borrowing costs have fallen substantially saving b every year The spending review makes the difficult choice politicians don t want to make and are the scape goat (e.g. with 700k public sector workers to be let go) Politicians can say no without looking bad because the spending review said they can t Main problem with the spending review projections: Previous versions projected growth that hasn t materialised 17
Cloudy picture but is there sunshine on the horizon? Good retirement advice should include a discussion of Spouse Inflation Potential LTC needs and include all assets: Private pension Public pension Additional savings Housing equity Should we advise people to keep a share of their pension for LTC? Now may not be the time to buy the product, but good advice now will ensure they have funds in future things are more clear 18
Standard Annuity v Underwritten Annuity v Drawdown Standard Annuities mean locking in very low rates Waiting for illness, and then cashing in on the uncertainty may lead to a pension increase Drawdown is a way to push out the annuitisation decision Combo Pack The best of both worlds? Drawdown and then immediate needs annuity A standard annuity to guarantee some income for life, and the rest for drawdown (not locking at everything at these annuity rates) Single-premium deferred LTC annuity 19
Designing a regulatory framework for success Will we have the crisis design it for us? We know we need something: We know the money is tight, so we need politicians to stop pretending: Stable Long-term Sustainable Cross-party support Integrated with other parts of government such as NHS, pensions, HMRC The spending review may make this clear The future possibilities lie in the UK economic growth rate and the growth in tax revenues Bulk equity release at the local authority level an opportunity? 20
How do I get more value out of my underwritten annuities data? Peter Banthorpe
General Comments Legal considerations Single data block Maximise predictive variables Integration of multiple data sets Common Application Form Fields Postcode Other consumer data 22
Quote Conversion Rates Market is becoming more competitive so increasingly important to: Understand price elasticity to drive pricing strategy Maximise profit margin Guard against anti-selection Binomial Analysis 0 = NTU, 1 = Completed Key observations Overall competitive position matters, a lot Higher loadings result in higher completion ratios Significant concentration in most common impairment combinations. but very long tail of conditions. Key challenge is how to meaningfully analyse the long-tail 23
Over Disclosure Risk Monitoring over-disclosure is: Expensive Likely to come under increasing pressure as competition increases Risk based monitoring strategies should help with this Benefits of monitoring under-disclosure: Treating customers fairly Quantify overall financial impacts Additional complementary data that can be simultaneously analysed Key steps now: Capture the data in a way that it can be integrated with other policy data Gather metadata to understand changes in underwriting approaches 24
Experience Analysis Expected calculations must include all underwriting loadings Current methods give favourable A/E results at short-durations Challenge is to get an early view of true results Information on cause of death useful for future analyses 25
Closing Remarks Data informs business decisions, also consider, for example: Underwriting process design; Product innovations. Understand evolution of the business model and control for this; There is likely to be under supply of good data analysts in the future; Understand your data now and plan for the future. 26
Comments or Questions? Ncolton@rgare.com gbecker@rgare.com pbanthorpe@rgare.com 27
Designing Your Underwritten Annuities