Increased sophistication in underwriting
This was probably the straw that broke the camel’s back. Specialist annuity providers such as Just Retirement and Partnership invested heavily in technology and underwriting expertise, which resulted in more and more people qualifying for enhanced annuities. The boundaries between good health and poor health were becoming blurred with the introduction of lifestyle annuities. Suddenly height, weight, drinking habits and blood pressures were being taken into consideration.
Put bluntly, it was no longer good practice to simply ask: “Do you have anything wrong with you?” The right question was: “Tell me all about your health.” The former placed the emphasis on the customer to reveal their personal medical details, which they did not realise was to their advantage, whereas the latter placed the responsibility on the broker to obtain as much information as possible about their customer’s health.
We do not have access to the actual conversations between insurance companies and their clients. I would not be surprised if state of health was discussed, but in such general terms that the connection between poor health and enhanced annuities was never properly understood.
Lessons
So, what can the industry learn from the history of open market annuities or, as some would say, ‘closed market annuities’?
The first lesson must be: do not try to do the job of advisers or brokers. Providers are very good at providing product solutions, but they are not so good when it comes to distributing them direct to customers.
The second lesson is: do not get behind the curve when it comes to innovation and technology. It can be argued that one of the reasons some companies fell short on enhanced annuity sales was that their underwriting and technology solutions lagged behind some of the specialist providers.
The third lesson, and one that advisers and brokers must also pay attention to, is to put compliance at the centre of the proposition. There are many examples of sales practice that passed through compliance at the time of the sale only to be found falling foul of compliance at a later date.
It seems we can now put problems with annuity sales behind us, but what will be the next mis-selling issue? Watch out for drawdown sales, because looking back from some time in the future, the income lost by not shopping around for the best annuity may seem like small beer compared to the income lost by not arranging drawdown on the best terms.
Billy Burrows is a director of www.retirement-iq.co.uk and an adviser with Better Retirement
Key points
People should shop around for the best annuity rates.
The commoditisation of the annuity market is one of the factors that adversely affected the annuity market.
