Why underwriting is important, how it works and the difference it makes
Underwriting enables providers to build an accurate picture of your client’s circumstances.
Everyone’s health and lifestyle information is individual to that person, and is used to give a better view on how long someone is likely to live for. This in turn means a provider can offer a tailored level of Guaranteed Income for Life (GIfL) specific to that client.
Changes in underwriting
Underwriting techniques have evolved over many years, and with developments in medical science and a wealth of data and expertise, we can say that everyone has their own personalised rate of income.
Previously, there was either a ‘standard’ annuity or if a client ‘qualified’ due to health and/or lifestyle conditions, they achieved an ‘enhanced’ annuity.
Now, you don’t have to be ill to get a personalised income. Therefore you can start with using height and weight, alcohol consumption, smoking habits, blood pressure readings (if known). This provides a more tailored figure than simply providing a postcode, and reflects how seemingly unimportant measures make a difference.
How it works
Underwriting information generally falls into two main areas, lifestyle and medical:
- Lifestyle – These are simple things like Body Mass Index, which can be used to determine if someone is underweight or overweight, which over time can have an impact on someone’s state of health. High blood pressure and cholesterol, respiratory conditions and even marital status all have an effect on life expectancy.
- Medical – these tend to be what would be recognised as illnesses, such as diabetes, heart conditions, strokes and cancer.
Underwriting uses the information gathered to determine the likely life expectancy of an individual. Of course no two people are the same, and so underwriting enables a bespoke income rate for everyone.
The difference that personalised underwriting makes
As the examples in the chart demonstrates, all health and lifestyle information can make a difference by comparison to a GIfL that has not been underwritten.
Client aged 65, £100k net fund, single life, no escalation with a 5 year guarantee period, monthly in advance*.
The actual level of income will depend on the individual’s personal circumstances. There will be no return of capital to their estate from their annuity when they die, unless they include death benefit options.
*Just rates 06.11.18 based on individual being married, 5ft 10in/13st 10lb, 7 units of alcohol weekly unless otherwise stated. Allows for 2% adviser charge.
Why is underwriting important?
Underwriting can also have far reaching implications in other areas of retirement and financial planning.
For example, if a client is taking an income from an investment such as pension drawdown, then a personalised GIfL will provide a sustainable income benchmark.
Additionally, if some guaranteed income is being put in place as part of a pension transfer from a Defined Benefit scheme, then underwriting will help determine the specific level of capital required to secure the target income.
Lastly, areas such as legacy planning and long term care provision can all benefit from having a better understanding of a client’s health and lifestyle as part of their financial review.
The introduction of information prompts by the FCA requires providers to show, if client consent is obtained, whether the GIfL rate on a quote is the best, or if there is a better rate in the market.
The results are based on the information supplied, and so the only way to ensure that the comparisons are accurate is to gather all of the client’s health and lifestyle information.
The Retirement Health and Lifestyle Form enables the client to provide their information, but also their consent for the Information Prompts.