How to take advantage of medically underwritten bulk annuities

However, the recent introduction of medical underwriting during the quotation process has proved crucial in making some of these deals affordable. 

Over the past three years, around £1bn of bulk annuity business has been written using this method.

Under the conventional buyout approach, insurers rely on indicative factors such as a member’s postcode and pension size to help determine their life expectancy assumptions.

Through underwriting, individual medical and lifestyle information allows insurers to refine their assessment of how long members may live.

Insurers are then able to reduce any risk margins, leading to lower pricing.

Potential savings from any health or lifestyle issues depends on the specific membership and varies between individuals; for a member with a serious medical condition, the saving could be 40 per cent or more.

Conversely, a member may actually be healthier than the average assumption adopted by a conventional insurer. Therefore, medical underwriting cannot guarantee a saving in all cases.

Pricing levels to date have been helped by some strong competition between the leading medical underwriting insurers, Partnership and Just Retirement, which has seen some schemes achieve transaction savings in excess of 5-10 per cent.

In August this year, the two insurers announced their intention to merge. This may impact market competitiveness, but medical underwriting will continue to be an attractive consideration for schemes.

How does the process work?

Medically underwritten quotation processes usually commence with a short member questionnaire.

For members of interest, this is followed up by obtaining a report from their GP or a telephone interview with the individual.

Adopting a communication approach that aims to maximise the level of member engagement is crucial in obtaining the full benefits from the underwriting process.

Adopting a communication approach that aims to maximise the level of member engagement is crucial in obtaining the full benefits from the underwriting process 

Quotation processes can either be exclusive with an individual insurer or on a competitive tender basis with several insurers.

For competitive tenders, established third-party processes now exist to collate and share information securely with each of the participating insurers.

Which members can be insured?

Typically the focus for medical underwriting has been on pensioner members where the information is likely to have the greatest impact.

For younger non-pensioners, medical issues affecting life expectancy are less frequent or predictable. The size and profile of members in a transaction should also be considered.

If the proposed transaction size becomes too large then it is likely that healthy members balance out the less healthy, leaving minimal benefits from medical underwriting.

A smaller transaction – up to 300-400 members – where a disproportionate amount of the liability relates to a relatively small number of members, is more likely to produce a saving.

Trustees and sponsors can also consider what, if anything, they know about the health of their larger-liability members.

A top-slicing approach, where pensioners with the largest liability are insured, opens up medical underwriting to schemes of all sizes.

Conventional insurers usually take a relatively prudent pricing approach for these members, so obtaining medical information helps to reduce risk margins and lower pricing.

This also offers a cost-effective way of removing the risk of significant increases in costs if these high-liability members live longer than expected.

Finally, the member selection process is important. The approach should be objective – for example, based on pension size or age.

In any subsequent insurance transaction for the remaining members, conventional insurers may decline to quote if they believe those with medical conditions have already been insured.

Gavin Markham is a partner at Barnett Waddingham