In their infancy enhanced annuities, like many innovations, were a niche product. Fast forward almost 20 years and it’s a very different picture. Aviva’s Nick Johnson reflects on the coming of age story of enhanced annuities, and gives some thought to the enhanced annuity adviser charging debate.
Where our story begins
Enhanced annuities are now firmly mass market. In fact, some might say they’re overexposed as the number of providers offering enhanced annuities, and the number of clients who qualify for them, continues to rise. But it hasn’t always been that way.
Cast your mind back to 1995 and the arrival of a new entrant to the advice market, the Pension Annuity Friendly Society (PAFS). PAFS business model was built on using annuitants’ medical information to underwrite annuity quotes. This meant they could confidently offer higher retirement incomes to people with reduced life expectancies.
Also in 1995, Stalwart Assurance launched a ‘smoker’s annuity’ followed a year later by a ‘lifestyle annuity’, which promised enhanced rates for obese people.
And so the enhanced annuity was born.
The adviser opportunity emerges
Other providers soon began to sit up and take notice. We all know how the story ends; the enhanced market is now buoyant with providers and advisers offering enhanced annuities.
But it didn’t happen overnight.
Remember, this was almost two decades ago. For providers, launching an enhanced annuity would have meant significant investment, and for what return? The sustainability of enhanced annuities was not yet established and therefore offered no guarantees.
With a selection of specialist enhanced annuity providers dominating the market, it’s likely that the majority of enhanced annuity customers were using the open market option, which presented an opportunity for financial advisers.
Indeed, barriers to entry into the enhanced annuity market were arguably fewer for advisers than providers. Though without the technology we take for granted today, selling an enhanced annuity would undoubtedly have taken longer and demanded additional work. As a result, advisers received higher levels of commission for enhanced annuities than standard annuities.
A new chapter for enhanced annuities
Fast forward to today. It’s estimated that enhanced annuities account for as much as a quarter of the market. Few providers haven’t got in on the act. Technology has advanced to the point that it’s now possible for all advisers to request annuity quotes online through the portals from a range of providers - making the process quicker and easier.
At the same time, Origo Standards, who work behind the scenes to simplify and speed up the annuity quote process, have succeeded in standardising the annuity quote questions set for all annuity quotes, making online quote requests consistent with the Common Quote Request Form (CQRF).
With online quotes, advisers can easily give providers full information about their clients’ health and lifestyle in return for a personalised and often higher annuity quote. And having this full information also helps providers to give guaranteed, automatically underwritten quotes instantly through online portals.