How underwriting needs to change to meet Consumer Duty

Pension annuities have been in the doldrums for many years but are now on the increase. This is due to improved rates and, with changes to pension taxation, they are arguably likely to increase further. Annuities providers turned their attention to bulk annuity contracts with defined benefit pension schemes and this market continues to grow. However, little has changed over the last ten years in terms of retail consumer products and processes. We ask: what needs to change in light of Consumer Duty?

Reinsurers tell us that around 60% of consumers receive ‘standard’ annuity rates – with no uplift because of health issues. This is alarming, because this figure should be more like 20–30%. Simplistically, it shows that around a third of customers receive lower annuity rates than they could qualify for. Clearly, this cannot be defended as a good outcome.

To understand the dynamics of this, we need to look at the processes. To obtain an enhanced rate for their annuity, providers need to understand the consumer’s medical history. This is almost always undertaken using an industry-standard medical form, which must be completed by the adviser, the consumer or a third-party specialist nurse assessor. Unless the assessment is undertaken by a nurse, it is fraught with challenges.

Consumers generally downplay their medical issues; advisers find it embarrassing and don’t really want to pry into clients’ medical conditions; providers earn more if they receive less information – and are more efficient if they can automate the underwriting process. Each party in the distribution chain will say they play their part – providers give the best quote on the information they receive, while advisers say they fill in the form as requested, and consumers don’t appreciate that worse health can be financially beneficial. Consequently, poor medical information is given, evaluated, and results in lower annuity rates being offered – reinsurer data indicates that this affects about one-third of consumers. This is an industry systematically delivering poor outcomes.

At MorganAsh, our annuities quotation service includes a medical assessment, by a nurse, to get good medical information – and it often unearths more material information than any standard application form. Repeated surveys of our work show that this process directly returns higher annuity rates for 76% of customers – with a mean increase in annuity rates of 2.5%, compared to completing the standard online application form.

Consumer Duty requires us to put in the same effort into delivering good outcomes for consumers as we do to generate sales. Annuities use a standard application form, followed by automated underwriting based on this standard form. In contrast to protection underwriting, protection underwriting demands more medical information, more rigorous verification, and a balanced use of automated and manual underwriting, depending on risk level. The standard application form makes it easier for advisers to get comparative quotes.

The last regulatory intervention promoted competition, and comparative quotes with the aim to improve outcomes, however, this has not improved outcomes as much as hoped.

Another major issue is if or when annuities are considered. There are multiple pros and cons as to whether an annuity should be used. It is generally accepted that they be part of retirement advice.  As consumers’ health generally declines with age, then arguably an annuity should be considered as part of any retirement plan – if not every year, then at least every few years, or when health issues change.

Since health is a major component of the annuity rate, a robust health assessment should be undertaken every few years.  Comparing standard annuity rates is only going to understate the real rate for at least two thirds of consumers. However, most annuity quotations are obtained at retirement age, indicating that annuities are only being considered at that age and not being compared through retirement.

The elephant in the room is the commercial bias for assets under management (AUM). Investments earn annual advice and management fees, while an annuity releases a one-time commission. AUM is the main method to value advice firms, and therefore, there is strong commercial pressure to keep consumers’ funds under management – and not release them to annuity providers. With so much acquisition and consolidation in the market, it is difficult to believe that this does not have an impact on decision-making.

Logically, those with health issues (the vulnerable) will receive poorer outcomes, because they get lower annuity rates than they are entitled to. Consumer Duty’s outcome reports should measure good or poor outcomes for retirees. It is highly unlikely though that the consumer will understand if they received a lower annuity than they deserve and are therefore unlikely to complain. To understand, firms will need to review consumers’ health, to determine if they could have received a better outcome; this may need to be built into current quality checking to avoid increased overheads. 

No doubt firms will aim to identify these issues within their Consumer Duty board reports and will be putting in place the measurements needed to understand consumer outcomes for the vulnerable. I’m sure that to change some of these processes will require cross-industry changes, which will take time.