An enhanced annuity allows people in ill health to receive a higher regular income in recog­nition of the fact that they, on average, have a shorter life expec­tancy than a healthy person. The en­hanced annuity market in the UK has grown signifi­cantly since its begin­nings in 1995. Hannover Re was a pioneer of this product.

The market

Until 1995, the UK annuity market was essen­tially static, offering only conven­tional annuity rates. The situ­ation changed with the intro­duction of enhan­ced annui­ties. Today, the product range includes im­paired as well as mode­rately en­hanced annui­ties on the basis of both full medical under­writing and simpli­fied under­writing pro­cesses, and post­code and life­style annui­ties solely based on socio-eco­nomic factors.

Since 1995, Hannover Re has part­nered with a number of provi­ders to support product develop­ment and en­courage market growth. The en­hanced annuity market, its products, and its under­writing pro­cesses have all become more sophis­ticated over time. Among the improve­ments made was an agree­ment between the main provi­ders to adopt a common medical question­naire in­cluding addi­tional questions relating to life­style factors and severe diseases.

Today, up to 95% of all en­hanced and impaired life annuity appli­cations are assessed on the basis of these question­naires. For the re­maining cases – typi­cally those invol­ving rare medical condi­tions – addi­tional infor­mation like a general practi­tioner’s report is re­quired before a quote is given. Nowa­days, there are a number of portals that allow inde­pendent finan­cial advi­sers to access infor­mation on pro­ducts and pro­viders, request compa­rative quotes, and trans­act new busi­ness inclu­ding online medical under­writing. Custo­mers obtain imme­diate guaran­teed quotes from a couple of provi­ders by simply answe­ring a limited number of questions.

Our solution

Hannover Re has more than 20 years of experi­ence and exper­tise in the en­hanced annuity market. We have access to a large data­base of im­paired lives which we analyse on a regular basis to update our morta­lity assump­tions. Our state-of-the-art auto­mated under­writing system allows for imme­diate guaran­teed quotes and enables Hannover Re and its clients to write en­hanced and im­paired annuity business on a profi­table basis.

Since the mid-90s, we have posi­tioned our­selves as a major rein­surer of en­hanced annuities. Our de­tailed under­standing of pre­vailing sales and distri­bution pro­cesses in the UK market allows us to provide solu­tions tailor-made to our clients’ needs.

Recent develop­ments

Tax rules in the UK made it more or less compul­sory to pur­chase an annuity before age 75. Tax effi­cient lump sum pay­ments (draw­down) were only avai­lable up to a limit of 25% of pen­sion pots. However, since April 2015 onwards pensio­ners will no longer have to con­vert their pension savings into an annuity. Pensio­ners now have com­plete free­dom to draw down as much or as little of their pension pot as they like any­time they want. Caps and draw­down limits will no longer exist and only the mar­ginal rate of income tax will be pay­able. The 25% tax-free lump sum is still avai­lable.

Although enhanced annuities volumes halved, Hannover Re con­siders the en­hanced annuity market to remain an attrac­tive segment and is eager to take up the challen­ges the new regu­lation brings.