AHEAD: the complete service for medically underwritten annuities

Further information and contacts
For more information on AHEAD, or Aon Hewitt’s
wider risk settlement capabilities and offerings,
please visit:
www.aonhewitt.co.uk/risksettlement
Or please contact your usual Aon Hewitt contact,
or:
AHEAD: the complete
service for medically
underwritten annuities
John Baines
0121 262 6944
[email protected]
Dominic Grimley
0121 262 5094
[email protected]
Paul Belok
020 7086 8089
[email protected]
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Risk. Reinsurance. Human Resources.
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Risk. Reinsurance. Human Resources.
AHEAD: the complete service for
medically underwritten annuities
Medical underwriting –
pricing opportunities
Annuities are priced using available information
that helps determine life expectancy – typically
occupation, pension size, postcode (as a wealth
indicator), age and sex. Medically underwritten
annuities (sometimes referred to as ‘enhanced’
annuities) go one step further by making use of
lifestyle and health data at a per member level
to help inform life expectancy predictions.
With a focus on pensioner members, pricing reductions
in excess of 10% have been witnessed compared to
the traditional market - even if members are in average
health - and this has understandably grabbed the
attention of trustees and companies alike, helping
generate rapid growth in this market. In other words,
you might be able to purchase a bulk annuity with
an effective return in excess of government bonds
plus 0.5% p.a. – when compared to other low risk
asset classes, this presents an attractive opportunity.
There are currently 4 insurers quoting for new
business in this market: Aviva, Just Retirement,
Legal & General and Partnership, with further
insurers considering an offer in 2015.
Collecting health data
Who is it relevant for?
Issues to consider
Collecting health data from your members need
not be an onerous task. Unlike in the individual
annuity market, members do not benefit from
an increase in benefits if they have a lower than
average life expectancy … but they could benefit
from a more secure pension. A well communicated
exercise, explaining these benefits, can typically
result in response rates in the 70-80% range.
Collecting medical information presents
opportunities, and not only for smaller schemes.
Increasingly larger schemes, are considering medical
underwriting for the larger liabilities, which can make
up a significant proportion of the membership – the
chart below is not unusual:
The medically underwritten annuity market can offer
attractive pricing, but there are issues to consider
before approaching the market. Below we highlight
some key issues trustees would need to consider:
The Aon Hewitt Enhanced Annuity Data (AHEAD)
platform provides trustees with a new process
for collecting member data which is faster and
more efficient than available alternatives. Data is
collected by a telephone interview or, depending
on your members’ preferences, by a paper form.
In both cases, the method of collection can
be efficient and unobtrusive. Importantly, all
data collected can be effectively used by all
of the insurers currently providing medically
underwritten bulk annuities. We believe that this
will maximise the competitiveness of the pricing
achieved without making the process onerous.
An informed provider choice.
The medical underwriting specialist insurers aren’t
as well-known as some of the traditional insurers.
200
Cumualtive liability (£M)
A new way of securing bulk annuities has developed
which offers schemes the opportunity to de-risk at a
materially lower cost. Aon Hewitt are able to provide
a one-stop shop to access the best pricing efficiently.
150
100
50
0
0
100
200
300
400
500
600
700
800
900
1000
Aon Hewitt will provide covenant advice, based on
reports by Cazalet consulting, a specialist insurer
analyst, and AKG who provide insurer covenant
ratings, to give you a rounded and informed view
of all providers before entering into a transaction.
Number of members
In this 1,000 member pensioner population,
a buy-in for the largest 100 members could
capture half of the risk
Even for £1Bn+ schemes, where the concentration
risk is not as acute, medical underwriting can be
appealing as the price savings from the larger
liabilities can be material.
Members with large pensions are typically expected
to have a long life expectancy, with traditional
insurers pricing the risks conservatively. Obtaining
medical information for these members can present
material cost saving opportunities with little
downside risk that they could live materially longer
than would be otherwise assumed.
Of course, having some insight into the health of your
largest liability pensioners will give you an insight into
the likely benefit, or otherwise, for your scheme.
This is in contrast to the approaches being taken
in some current auctions, where three different
parties are used to broke the market, collect the
health information and provide due diligence.
We can greatly simplify your approach so you
can focus on what matters – the comfort of your
members in providing information.
What if all my members are healthy?
If the data collected by AHEAD shows all members
to be healthy, this will increase the expected cost.
Our observations on the market are:
(a)60% of individuals have some form of condition
to support a lower annuity.
(b)Even if all members are healthy, the lower
pricing from some enhanced annuity specialists
mean that this may still be cheaper than the
traditional market.
Overall, we expect the medically underwritten
market to continue to grow and offer an attractive,
affordable way to reach pensions stability.
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