by Hamish Wilson, Senior Consulting Actuary and Elaine Murphy, Actuary, Hymans Robertson
One thing has become increasingly clear; doing nothing is not an option for insurers with existing annuity policyholders. Even those with no intention of directly entering this market will need to make a raft of operational changes in order to facilitate annuity sales, and for those wanting more active market participation, early entry and competitive pricing will be key to winning market share.
Facilitating annuity sales
With increasing press coverage of the availability of the new market, all insurers will need to be ready to answer policyholder queries and have systems and processes in place to allow sales to happen. The key areas insurers should be focussing on are:
Administration:
Payroll processes will need to be updated to enable payment to third parties;
Consideration of tax treatment of annuity income, in particular to where policies are sold to corporate entities;
Documentation requirements.
Communications:
Firms will need to communicate with existing customers to highlight the options that are available to them and the risks that come with selling their annuities;
New annuity sale documentation will need to be updated to reflect the availability of the new market.
Death notification processes
Consideration will need to be given to how firms will monitor deaths post annuity sales, and any impact this may have on reinsurance treaties and valuation bases.
Market participation
Firms may be tempted to enter the market, either by buying back their own policies, or as a third party buyer due to the attractiveness of a longevity linked income stream as an alternative asset class.
The former will need to consider the impact on their balance sheet, and liquidity plans and matching adjustments may need to be revisited. For firms considering actively participating as buyers of the assets, significant analysis will need to be carried out to understand fully the characteristics of annuity income as an asset class. This will include consideration of what structuring would be needed to make the asset eligible for Matching Adjustment purposes.
Value for money is likely to be a key decision for policyholders on whether to sell their annuities. Firms will need to consider how to create value for customers through a sales process where fixed costs of underwriting to fend of anti-selection and potentially low completion rates could have significant pricing implications. Firms that manage to innovate replacement products that reduce this anti-selection risk will be at a distinct advantage.
This is a market where conduct risk will also be high on the agenda of both the regulator and participating firms.
Evidence that appropriate steps are being taken to deal with this risk will be needed, particularly when it comes to more vulnerable customers.
With estimates of the size of this market varying considerably, the popularity of secondary annuity sales will not become evident until the market fully comes into effect next year. It is likely however that the market will consist of an initial surge of sales driven by pent up demand from pre April 2015 annuity sales, before settling down to a lower level. Firms wanting to participate in this market will need to so quickly and have a clear strategy in place ahead of April 2017.
It is vital for firms to remember why customer are attracted to the notion of selling on their annuity; lack of flexibility with current products and a desire for lump sums. If insurers can innovate and develop products that provide that flexibility and allow for lump sums, then in our view they will be in a good position to capture market share.
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