There are stories of people’s parents being forced to take out an annuity when they were in poor health and losing out heavily in the process. We are living in an era of change, and as we go from the old order to the new one there are anomalies that will arise.
Insurance is about pooling of risks. In this way the more fortunate subsidise the less fortunate. It is a very unselfish and Christian thing to do. Most directors of life insurance companies in this country used to be practising Christians. It was in the 1980s that things first began to change. It started with motor insurance.
There was a time when motor insurance premiums were not specifically age-related. It depended only on your claims history. A 50-year-old father could insure his son on his policy without a material increase in premium. Then computers arrived and enterprising new companies decided to undercut established insurers by offering cheaper premiums for the over-50s. They siphoned off all the good risks, forcing the established providers first to do the same and second to charge much higher premiums for younger drivers. I remember my utter shock in 1994 when I bought my 22-year-old a secondhand Golf for £5,000 and found that Royal, my employer, and where I was a director, wanted to charge £2,000 a year to insure him.
The consumer champions have emotive phrases such as ‘rip-off’, but sometimes such terms are libellous. What was offered in the past was fair; what is being offered now is fair too. They are two different ways of looking at things. All I would say is that the modern way means that some people would find themselves uninsurable because the premium they have to pay is too high.
The modern way means some people find themselves uninsurable because the premium they have to pay is too high. The modern approach too, is un-Christian; I might say too right-wing Tory, although it is, in the context of the US, very Republican, a party that is ultra-conservative Christian. Certainly, modern directors worship only filthy lucre.
Coming now to annuities, this product was the last in which complete cross-subsidy took place, as no account was usually taken of the person’s health. There have been an unfortunate few who have died prematurely and lost out. However, mortality studies indicate that mortality rates have improved more than insurers expected. So the majority of the annuitants are winning. The winners keep their head down, while the losers moan.
Gradually, this product is also changing as impaired lives’ annuities become more common. If all annuitants are underwritten, the poorer lives will gain, the healthier ones will lose out.
Will the world be a better place to live in? That depends upon your point of view. As far as I am concerned, it is becoming a very lonely place where self-interest prevails. If you want to see where this could lead just visit Detroit, or Los Angeles, or Washington and see the plight of the underclass.
Icki Iqbal is a former director of Deloitte
