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 personal, lifestyle and medical 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.

In March 2018 the FCA introduced annuity prompt requirements, these are set out in COBS 19.9. These rules require firms to provide their annuity quote in a prescribed template when a guaranteed annuity quote is provided to a customer.

These rules also require that when a market leading quote is not being provided to the customer that a visual comparison is made between the market leading quote and the actual quote provided.

These rules were strengthened further as part of PS19/1 which was introduced in November 2019. Firms are now also required to ask customers who express an interest in buying an annuity questions to determine whether they are eligible to buy an annuity incorporating their personal, lifestyle and medical information rather than comparing using only their personal data.

They also require firms to use personal, lifestyle and medical information (where provided), to generate a market leading quote.

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 lifestyle and/or medical conditions they secured an ‘enhanced’ annuity.

Now, you don’t have to be ill to get a personalised income. COBS 19.9 provides examples of the sorts of lifestyle and medical circumstances that may lead to a provider offering a better rate. These include:

• Whether the customer is or was a smoker.
• Their height, weight and waist size and whether these are outside normal ranges.
• The number of units of alcohol consumed per week.
• Whether the customer is taking medication for high blood pressure or high cholesterol.
• Whether the customer is taking medication for serious health conditions.

So now, you can start by simply providing your age, marital status, post code, height and weight measurements, alcohol consumption and smoking history, providing even these details results in a more tailored figure than simply providing a postcode alone, and reflects how seemingly unimportant measures make a difference.

How it works

Underwriting information generally falls into three main areas,  personal, lifestyle and medical:

• Personal – These include information such as your age, marital status and post code.
• 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; smoking history and alcohol intake.
• Medical –  any diagnosed medical condition from high blood pressure or high cholesterol, through to diabetes and  more severe conditions such as 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 an unique rate to be calculated that is specific to you.

The difference that personalised underwriting makes

As the examples in the chart demonstrate, all personal, lifestyle and medical information can make a difference when comparing 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 26.04.2023 based on an individual being married, 5ft 10in/13st 10lb, 7 units of alcohol weekly unless otherwise stated. Allows for 2% adviser charge.