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Annuities what we looked at

Era of innovation

It is no secret that the impact of new players in the annuity market has had a significant effect on mainstream providers. Inevitably, impaired and enhanced providers are cherrypicking the customers with greatest mortality risk. This dilutes the profitability of the traditional provider’s standard annuity book, so not responding is increasingly not an option.

This has an effect even for those companies which only offer annuities to their pension accumulation customers at retirement. I am beginning to see strong indications that some of the players who have not focused on the impaired/enhanced market to date will be deciding to either radically change this position or exit the annuity market entirely and outsource their maturities to other providers.

In a marketplace that is so price-sensitive, underwriting obviously can make an enormous difference and must represent perhaps the greatest opportunity for innovation. It is really positive to see that the common annuity quotation request form has now found its way into an online format and evolved into the electronic marketplace where arguably it should have started in the first place.

Such services are now showing real promise but there is still clearly massive scope for further innovation. Many of the techniques that originated in protection underwriting are being embraced by an increasing number of annuity providers, so much so that right now more innovation is taking place in the annuity market than protection.

Following the ECJ gender ruling, I have been involved in a number of conversations with protection providers around the idea of extending comparative protection quotations to include a significant level of additional information in the quotation process. More often than not, the response has been that this would be too complicated or too expensive to implement. In practice, an increasing number of providers are making exactly these changes within the annuity market.

The extent of the long-term benefits advisers can deliver to a consumer through finding the very best annuity return may mean this is one area where adviser charging could justify higher levels of remuneration. Demonstrating value to consumers in this way can be relatively black and white. However, market research continues to suggest consumers are reluctant to pay more than minimal amounts for such a service. This identifies one of the major challenges the market will face in a post-RDR world, demonstrating the value of advice in terms consumers can understand and will be willing to pay for.

Perhaps there is a need for a tool which enables advisers to demonstrate the additional charges it is reasonable for them to apply in the interest of achieving a higher income for life for the investor to make with an annuity provider who might quote great rates but offers a poor service compared with a provider who offers a great service with slightly less competitive rates. This could demonstrate why the adviser needs to charge more because of the additional work involved. Such a system might also factor in the impact of a month (or more) delay in payments commencing where provider admin is less efficient.

From a provider perspective, while improving underwriting processes can bring obvious benefits for insurers giving the greater ability to attract exactly the risks they want when it comes to other parts of the business process, the case for enhancements to help advisers is perhaps questionable if the marketplace is so price-sensitive. While in principle all insurers would I am sure sign up to the concept of providing the best possible service, in reality, how much money will they be prepared to invest in process changes that do not deliver to their bottom line? In practice, any such changes are going to have to take real cost out of the provider’s business process. There are obvious things which could be done to help streamline the new business process from the adviser perspective. Full pre-population of client details, not just from the quote but also the adviser’s client management system or other record-keeping systems, is clearly beneficial. Equally detailed application tracking has the potential to considerably reduce cost for advisers.

The critical issue here is how to implement such processes in ways that will give the adviser’s staff the confidence that they have exactly the latest position without the need for telephone calls for progress updates. This means notifying the adviser of all changes as they are recorded in the annuity provider’s own systems, doing so as soon as the change takes place and also confirming the next steps in the process.

There are strong indications that significant parts of the annuity market will increasingly be operated via online consumer-facing services from advisers, both independent and restricted. This is an area where full straight-through web to application and processing have much to offer.

No summary of the evolution of the annuity market from a technology perspective would be complete without reference to the Origo Options service which has clearly done so much to reduce many of the delays previously experienced by so many consumers at retirement.

With the benefits so clearly demonstrable, I am tempted to think that failure on the part of a ceding pension provider to implement the service must be bordering on a breach of treating customers fairly.

With evidence of the average timescales for processing annuity transfers so clearly available, it should not be too hard to calculate levels of compensation that might be appropriate where delays occur involving providers who have not put the Options service in place.

Just a few years ago, successful implementation of technology in the annuity market was rare, now increasing numbers of providers are successfully transforming their operations. This considerably raises the bar of what can be seen to be an acceptable level of service. This is a message those providers looking to increase their share of the annuity market need to pay close attention to.

Click here to view the full Annuities E-Excellence Rating 2011

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