Published by Gavin Markham on
Mark Paxton contributed to the writing of this blog
The buy-in deal insured the pensioners with the largest liabilities in the scheme – a process known as 'top-slicing'. The pensioners formed part of a multi-billion pound scheme and so the average pension amount per member insured under the transaction was particularly large. This demonstrates that the use of medical underwriting can potentially be applied to schemes of all sizes where a top-slicing approach is adopted.
“Even for schemes where the liability distribution may be weighted more evenly, the liability for the members with the highest pensions can be very significant in absolute terms.”
High-liability members can often represent a disproportionate part of the risk that a scheme faces. If such members live longer than expected, the value of the scheme’s liabilities will see a significant increase. For some schemes, these high-liability members may account for over 50% of the total liabilities so there can be a considerable reduction to the scheme’s overall risk if they are insured. Even for schemes where the liability distribution may be weighted more evenly, the liability for the members with the highest pensions can be very significant in absolute terms. By obtaining individual medical information for these members when insuring their benefits, a material saving relative to traditional pricing can be achieved, particularly if there are any health or lifestyle issues which may lead to a shorter life expectancy.
There are four insurers currently active in the medical underwriting market – Partnership, Aviva, Just Retirement and Legal & General. Therefore, it is possible to structure a transaction process involving more than one insurer, providing employers and trustees with the comfort of knowing that deal has benefited from competitive tension between the insurers. General experience so far suggests that a fairly high response rate from members can be achieved when requesting medical information. As an example, in a similar top-slicing buy-in process that we recently ran where all four insurers were quoting, we achieved a positive member response rate of over 90%, with each member agreeing to supply medical information.
There are some issues to consider when looking at a potential medically underwritten process. Firstly, insurers who do not provide a medical underwriting offering have stated that they will not quote for transactions where medical information has been obtained. This is because they are unlikely to win a transaction where the members are in poorer than average health overall. Conversely, they are more likely to win a transaction where the members are in better health than average, which will prove to be more expensive in the long run. As a result, trustees or employers are effectively committing themselves to a medically underwritten approach, at least for a number of years, if they decide to obtain medical information.
Consideration of which members to insure is also important. The method used to top-slice the members should be objective (e.g. pension amount) and in a way which isn’t linked to the member’s health to avoid any pricing implications for the remaining members. A medically underwritten process may also typically take longer. For example, a top-slicing approach is likely to involve the collection of GP reports for at least some of the members which will need to be factored in to the potential timescales.
However, at this stage in the development of the market, and given the impact of the Budget 2014 announcements on the individual annuity market, the enhanced appetite of the specialist insurers means that medical underwriting may well offer an attractive option for the right schemes.