Annuity mis-selling – the need to keep medical information on file

The Aviva case should be a wake-up call to many.

On Saturday 28 March, the Telegraph ran a story: “Is this the worst pension mis-selling case ever? Aviva knew this customer was ill”.

The story, by Katie Morley, highlights the case of a nurse who was in ill health and did not receive the appropriate health enhancement for her annuity. She subsequently complained to Aviva, and ultimately, with the Telegraph’s help, has received compensation.

The compensation looks to be retrospective with additional income being paid for annuity income paid out so far and an increase for the future annuity income. The additional monies are based on the difference she should have received if her actual health had been taken into account at the time of the annuity sale.

Consumers not receiving the appropriate annuity, due to an inadequate health assessment, is of no surprise to many in the industry. What is, I think, a precedent, is that the claim was based on Aviva already having the health information on file. Further, that this information was held and collected for a different financial product 3 years previously to the annuity sale. This has massive implications and not only for annuities and providers but also for the annuity sale process.

We don’t know the exact details of the sale process, and I suspect that the sale process was not greatly different to that undertaken by many others at the time. My suspicion is that although Aviva is the party in this case, it could have been many other providers or advisors. My suspicion would be that the attempt to obtain good medical information at the time was inadequate, and again this was not uncommon and indeed is unfortunately still ongoing today. We know that around 70% of consumers qualify for an enhanced annuity when their health is properly assessed, and yet a far lower proportion of consumers are receiving the incomes they deserve.

Many sales processes rely on asking the consumer some health questions, and rely on the answers with no checking, validation, or cross-checking against previous records. The information is simply passed onto the provider. This is in stark contrast to how we collect financial information. Typically, we have trained advisors to explain the questions, validate the answers and in most advised cases to cross-check against previous financial information on file.

What this case is highlighting is that if the seller has the information on file, or does not undertake a proper health assessment, then it is deemed mis-selling. In this case, the sales team were part of a provider, and the provider had material health information on file for a different financial product processed some 3 years previously. This will be typical across providers whose systems are organised around products, rather than consumers.

I doubt whether many advisors’ sales processes retain the health information on file – they may collect it, but they may pass it onto a provider for a life insurance or other quote, but not retain it. In such circumstances, not only are they not using this information for their customer, but they will have no information on file to defend such a claim from a disgruntled annuitant.

Many advisors will cite that by sending the annuity application to a whole-of-market application process they ensure they receive the best price and that single sales from providers do not do this. This was certainly true up until recent times, but the truth now is, if the medical information is not supplied to any of the providers because it is not collected in the first place, then the price received from any provider will not reflect what the consumer could receive.

The negative publicity around annuities, and the potential secondary annuity market, is in my opinion going to reveal more disgruntled annuitants, who received a poor deal. Further annuity rates are going to remain low in line with investment returns. Any annuity sales process should be concerned at this precedent. The conclusions are:

• Ensure proper medical assessments are undertaken.

• Keep the medical assessment on file.

• Obtain the best annuity rates.

The future of underwriting

Smart underwriting is better than no underwriting.

Underwriting is out of favour at the moment, and we are seeing a trend towards simplified underwriting, simplified products, shorter questionnaires, and higher priced products taking on more risk. These initiatives are aimed at improving the customer journey and increasing sales by dropping the ‘cumbersome’ underwriting elements. However, there is little evidence to show this approach is working. For example, in the UK sales continue to fall. This article takes a contrary view and explores how we can use underwriting to increase sales.

The changes taking place within underwriting are well-documented, including how the traditional underwriting process is no longer appropriate. However, there are several areas of the sales process that can be enhanced in order to make underwriting a positive part of the sales process rather than a negative. We take a look at each of these in detail below.

• The integration of the sales and underwriting process

• Providing a personalised sales and underwriting journey

• Promotion of underwriting as a personalised assessment

• Improve customer expectations by giving rated prices up front rather than starting with a standard price and then increasing the price

• Engaging with the consumer

Integrating the sales and underwriting processes

In the UK, online systems already provide ratings at the point of sale for around 60% of consumers for life and critical illness products, but there are still 40% of consumers (and all those that need disability products) that are not covered by these methods. To provide a positive customer journey, a process that integrates the manual and the automatic underwriting into the sales journey is required. While this could be instant, it is more likely to have a short delay while the manual underwriting takes place. This is not the end of the world – it can be an integral part of the sales process, as we shall explain further below.

Personalised underwriting

In the times when paper forms dominated, the process had to provide a standard set of questions to every applicant. But now as we have technology, every set of questions can be bespoke for the consumer. In online and tele-sales processes this is already done for gender and product with questions only asked if they are applicable. It is proposed that this can go a lot further. For example, the information gathered can be made dynamic based on age and the distribution channel if it is the consumer, or, if an agent is asking the questions, the amount of insurance required, by duration and amount. Hence, in effect, we can dynamically move from a ‘simple underwriting’ to a ‘full deep underwriting’ approach depending on these many factors. In addition, the questions can be made conditional upon the questions already answered. If the consumer changes the answers, questions to validate this change can be triggered. The quality of the agent undertaking the interview, if the interview is voice-recorded, can all trigger different risk profiles in line with the risk of anti-selection and non-disclosure. Not only can the questions flex for risk reasons, but also for the customer journey, making reference to the process so far, and predicting the next steps of the process, specifically for each consumer. Question sets and scripts have been built purely focused on collecting risk information. The next step is to start amending these scripts in line with custom engagement, both in design and dynamically.

Promoting underwriting as a personalised assessment

People like to be treated as individuals and don’t like to be treated as ‘standard’. The underwriting process is bespoke for each individual. Automated or manual, it is an assessment of the individual’s unique circumstances. Unfortunately, this great value is hidden by a process that treats everyone the same. However, by using technology such as online, phone or live chat, we can manage every consumer individually and give them feedback that is individual to them. The value of this individual assessment should be promoted, making the consumer feel they are being treated as an individual. Examples could be: “This will be individually underwritten and will be personal for you. It does mean that if you are unfortunate enough to claim, you will be covered, even though you have had some conditions before.” Because we are in the finance industry we like to talk to our customers about finance, and we avoid the medical issues as we are uncomfortable talking about them. However, most consumers are more at home talking about medical issues than finances. Culturally greeting across the globe enquire about people’s health, for example “how are you?”, yet financial matters are often taboo. So, in reality, asking people about their health is perhaps not as big a barrier as one would expect.

Rated and standard prices

It is well-documented and understood that the common practice of quoting ‘standard’ prices and then increasing them with rating or exclusions leads to a reduced rate of sales for these rated cases. So much so that many processes just avoid the rated cases, either officially or probably in far greater numbers unofficially. Most research tells us that the consumer overestimates the price of insurance, and it is the belief of many that the process of giving a low price and then increasing it later is a major factor is turning these consumers away from their purchase. Online automated underwriting systems have enabled the provision of rated prices up front in the sales process for a proportion of consumers and this is great progress. There are some new services that offer indicative underwriting to improve the process. These solutions are incremental improvements to the existing process to reduce the ‘standard price’ sales detractor. While these are steps in the right direction, it is proposed that in the future we can go further than this by integrating our underwriting and sales processes completely. Underwriting processes can be undertaken in parallel with sales, rather than afterwards in series. For the ‘clean’ cases this will have no impact. For those with conditions it will allow for automated and manual underwriting, at the time of a sale. It takes less time for an underwriter to make an underwriting decision than for a consumer to complete an online form or a tele-interview to collect this over the phone. Underwriters could view this data in real time and give instant decisions, although probably allowing a short delay of a few hours is probably more practical for resourcing reasons. We underwrite early in the process and quote an indicative underwritten price, and hence never quote a ‘standard’ price. We manage the affordability issue up front, thus managing expectations. While this may qualify out some consumers at the start of the process, this is far more efficient and consumer-friendly than qualifying them at the end of the process.

Sample – customer journey – changing the process to improve engagement

Consumer engagement

Tele-interviewing and the automation of processes online have been two great improvements within underwriting over the last ten years as the industry has largely moved away from paper. Both approaches are dynamic, allowing changes in line with the inputs, whereas paper was a purely static one-size-fits-all process. The main focus of these systems has been to reduce our transaction costs and speed up the process, and they have been very successful at both of these pursuits. However, the truth is sales are going down and the majority of transactions started online are in fact completed offline. There are many reasons for this, some due to the awkwardness of the process but mostly due to the old adage that ‘products are sold and not bought’, and the human touch is still needed to make the consumer feel comfortable about their purchase. While some insurers still pursue increased automation using STP (straight-through processing) rates it is proposed that we should turn our attention to increasing our engagement with the consumers. The STP fad is over and it’s time to focus on consumer engagement to make the process itself more enjoyable rather than simply try to eliminate it. Part solutions to the above already exist in various forms. For example, experienced protection advisors manage the consumers’ expectations through the process, treating them as individuals. However, these are in the minority and this is difficult to replicate in direct-to-consumer channels. Most online processes are handed over to a telephone sales team who talk the consumer through the process. The usage of live chat is encouraging and allows underwriters to talk to consumers about their likely rating prior to proceeding with their application. Technology is also helping us, with the ability to merge tele-interviews and online applications so consumers can choose the way they want to buy. The increasing use of smartphones and tablets drives us to shorter, more personal engagements using voice and text for now, and video in the near future.

At MorganAsh, we are using underwriting as part of our consumer engagement, and it works. While not for everyone, and far more complex than the ‘simple’ approaches, it is not uncommon in other industries for simplicity to be presented from complex systems behind the scenes. Simple consumer engagement with full underwriting in the background will provide the best price solution, and hence over time I believe will rise in popularity.