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Enhancing annuities

Annuities can be seen as an insurance against living too long as opposed to the life insurance risk of dying too soon. It will follow, therefore, that a client&#39s life expectancy is a major part of any annuity calculation.

It will also follow that, in calculating an annuity, the actuary will use mortality tables. To date, few offices have tried to distinguish bet ween good and bad lives – one size fits all – the client in poor health subsidises the super-fit.

You have to question why this situation has arisen. The only answer can be the traditional stilted thinking of the life insurance industry.

By this, I mean that, to ass ess a risk, you ask medical questions that lead to an underwriter requesting a PMA or medical before being able to quote a rate.

This puts in a delay that is acceptable for life insurance but totally unacceptable for annuities. At retirement, the client wants to know exactly what is his pension and wants it as soon as possible. Medi cal investigation is far from his mind.

The solution is to look at things in a totally different way. The medical questionnaire must be redesigned to enable a client to answer from what he knows rather than to elicit generic description of illness and to use the answers to give an accurate rate.

The trick is then to convert a client&#39s answers into a rat-ing without the need for medical evidence.

This is exactly what the Evergreen underwriting system does. Take high blood pressure or high cholesterol as an example. The traditional approach is to ask a client what is wrong with them and then seek a reading from the PMA.

The Evergreen approach is to ask the client if he knows the reading. Some do but for those who don&#39t, the next question is how many medications. The technology can then assess the level of blood pressure from the number of medications.

Other questions include how long have you suffered from the illness, when did you last have symptoms, have you been hospitalised and the degree of mobility.

All these questions are known to a client who does not need detailed medical knowledge to answer.

The clever part is in the technology that assesses the degree of severity of conditions from the client&#39s ans wers. It then combines cond itions to provide an accurate rate. Providing the client has told the truth as validated by the PMA, then that rate is held.

We live in the 21st Century with improving life expec tancy and a desire for a hig her-quality, active retirement. By giving a client a higher pension – cost-effectively and efficiently, you are carrying out a great service to your client.

Bear in mind that this is a massive market – only one in four people exercise the open market option – another Ever green hobby-horse but further evidence of how traditional thinking by life offices acts against the interest of the client.

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