Towers Watson Finds Growth in UK Enhanced Annuity Market

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September 8, 2010 Wednesday 01:22 PM EST

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Towers Watson Finds Growth in UK Enhanced Annuity Market

Robert O'Connor

LONDON

Enhanced annuities, which are offered to customers whose medical conditions, habits or occupations are deemed likely to shorten their life expectancies, are growing in importance in the U.K. life market.

According to consultant Towers Watson, enhanced annuity sales in the U.K. totaled 1.26 billion pounds (1.51 billion euros) in the first six months of 2010. This was 41% higher than the figure for the second half of 2009, Towers Watson said. The market also set sales records of 582 million pounds and 676 million pounds in the first and second quarters of 2010, Towers Watson said.

A potential buyer might qualify for an enhanced annuity if he or she is overweight, smokes or does dangerous work.

The full-year sales figure for 2009 was 1.78 billion pounds, up from 419.6 million pounds in 2001, Towers Watson said.

Vasilis Katsipis, general manager of analytics, at the A.M. Best Co. in London, said the U.K. enhanced annuity market has been boosted by a greater awareness of health issues. The incidence of smoking has decreased, he said, while damage caused by obesity and alcohol is becoming better understood .

There is greater appreciation of "certain segments of the population that are not getting healthier," Katsipis said.

According to Towers Watson, the product was introduced in the U.K. in 1995. Companies active in the U.K. market include Aviva, Canada Life, Legal & General, LV= and specialist financial products provider Just Retirement.

"Enhanced annuities, also known as impaired life annuities, make up over a third of all annuities sold (by premium volume) in the open market in the U.K.," Towers Watson said in a statement.

Andy Sanders, a senior consultant at Towers Watson, said in a statement that 2010 "looks set to be another record year" for the enhanced annuity market in the U.K., "with every prospect of breaking the 2.5 billion pound threshold for the full year."

Enhanced annuities were introduced in the U.K. by a company called Stalwart, which was later acquired by GE Capital. The Stalwart approach was a variation on the traditional life insurance practice of collecting and evaluating the lifestyle information of would-be customers. Answers that could indicate a poor insurance risk might suggest a good prospect for annuities, since the provider might not have to pay out for so long.

But while life insurance premiums have long varied according to life expectancy assessments, fees charged for annuities did not tend to follow suit. This meant, he said, that people who died early were effectively subsidizing people who lived longer.

"From the numbers that we've seen on some of the companies, it is profitable business," Katsipis said of the enhanced annuities sector. "In a way, up until now, it's been more profitable than the annuity business because it was a market that competition was ignoring."

Phil Naylor, director of individual annuities at Legal & General, said enhanced annuities are "the fastest growing area in the individual annuity market."

Not only did enhanced annuities make up about 22% of the market in the second quarter of 2010, Naylor said, but trends suggest they are likely to become increasingly important. From the first quarter of 2010 to the second quarter, he said, the overall annuity market in the U.K. dropped by 1%. At the same time, he said, the enhanced annuity market grew by 16%.

"This is the future of individual annuities," Naylor said. "At some point in the future everybody that buys an annuity will answer some sort of medical questions."

Enhanced annuities are mainly a U.K. product and fit well within the large U.K. annuity market, Naylor said.

The independent financial adviser is the key to the market, said Naylor, who attributes much of the double-digit growth in the enhanced annuity market over the past three or four years to small specialist advisers. IFAs generated more than 90% of Legal & General's 2 billion pounds-plus annuity business in 2009, Naylor said. He put the total market at more than 10 billion pounds.

Darren Dicks, head of retirement at Aviva, agreed that financial advisers have played a major role in the development of the enhanced annuity market over the past three or four years. These advisers were responding to the efforts of new providers who were seeking to build customer bases quickly, said Dicks, who noted that an alert adviser will ask a customer about a possible medical condition that might create eligibility for an enhanced product. The new providers, Dicks said, have the advantage of not being hampered by legacy issues.

"This market is profitable but it has to be, because it's a significant amount of risk that the insurer is taking on. You can never tell exactly how long people are going to live," he said.

Over the next 18 to 24 months, Dicks expects the differentiation between enhanced annuities and non-enhanced annuities to disappear. "More and more of those product lines are getting blurred," he said.

Katsipis of A.M. Best said he expects profit levels to fall as more companies enter the enhanced annuities market. A life insurer might say: "We can reduce our prices and still get very significant business volumes at a profit."

The U.K. enhanced annuities sector is dominated by domestic providers, Katsipis said, with reinsurance coming from Germany and Switzerland. Hannover Re has supported the market from an early stage, Katsipis added, while "Swiss Re and Munich Re are catching up."

Canada Life Assurance Co. and Legal & General Assurance Society Ltd. have current Best's Financial Strength Rating of A+ (Superior).

(By Robert O'Connor, London editor: [email protected])

September 9, 2010

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