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Annuity pricing alert as longevity grows

Insurance companies could missell annuity products in their efforts to stem the effects on their solvency of people living longer, the FSA warns.

In its report, Financing the Future, published this week, which looks at the implications of the ageing population, the FSA says the “growth and potential mismanagement of longevity risk poses a threat to firms&#39 solvency”.

The report says: “The key risk to providers is one of mispricing annuities. If the pricing is wrong, this might not be known for decades.”

But actuaries and the ABI have dismissed the regulator&#39s claims, saying increasing long-evity is no surprise to the industry and its effects are closely monitored in pricing and developing products.

The FSA says insurance companies will be pushed into designing products that “take some of the burden of longevity risk from firms&#39 balance sheets and on to the consumer”.

This is where an annuity is reduced if someone outlives their life expectancy such as in with-profits annuities where income can be clawed back using the with-profits fund.

As consumer understanding of annuities is low, firms may risk misselling products.

The report says: “There may be increasing pressure to sell such products when the consumer may not understand their characteristics. This poses the potential for misselling risk.”

Norwich Union head of actuarial support Rob Kerry says: “We do allow for improvements in mortality in reserving and in pricing. But as products move away from the mortality risk staying with the insurance company and become more complex, the onus is to make people aware of the risks.”

Britannic Retirement Solutions corporate development director Bob Bullivant says: “There is a raft of information that assesses life expectancy which the FSA seems to have ignored. I thought insurance companies were set up to take on risk. A misselling risk already exists through with-profits annuities, where people are not always told explicitly what they are taking on.”

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