The Golden Goose

So half year results are out for insurance companies and there is a consistent theme.  But it’s hidden away, not talked about, or commented on.  Yet it generates anywhere between 16% and 40% of profit.

The golden goose for many is annuities.

It’s true people aren’t saving enough, but it’s also true too many people feel they have no option but to take an annuity, and most (80%) opt for single life and most with the company they started with.

Consider this – a man has a 50% chance of surviving until 85, a woman until 88, but as part of couple there is a 50% chance of one surviving to 92.  Not only does the wrong shape of annuity leave your dependents potentially stranded (another debate) it gives more golden eggs to the providers.

Another little egg is the poor health of the nation.  Enhanced annuities are becoming more widely available and that is a good thing.  But without an adviser only 2% of premium value is being placed in enhanced annuity.  That figure is 41% in adviser land.  Given the estimate is some 70% of people can qualify, for enhanced annuity,  you can see how profits can rack up.

There is a chance the introduction of annuity broking sites might make the position worse – well worse for customers at any rate.  These “simple” buying journeys could continue to mean more single life standard annuities, and increased profits for product providers.  With perhaps any improved rate offset with higher commission?

Companies need profit.  But we are continually obsessed with shaving 5 to 10 bps of the price when growing the savings pots.  Yet, no-one is really lifting the lid of the margins being made when it comes to taking the pot.

The mechanics of risk products in general are complex, and for sure Solvency II leaves things more complex.  And honestly I don’t understand how it works.

But it seems to me there should be room, in the huge margins made from annuities, to allow the golden goose to leave improved nest eggs for customers,  not just shareholders.

 

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4 thoughts on “The Golden Goose

  • Dave, really excellent article.

    This line is particularly true: “But we are continually obsessed with shaving 5 to 10 bps of the price when growing the savings pots. Yet, no-one is really lifting the lid of the margins being made when it comes to taking the pot.”

    We recently wrote an article highlighting the fact that advisers (and retirees if they go direct) should always haggle with Annuity providers to ensure they get the very best rate. One of our advisers had a case where the best initial quote was £9,956, but after pushing the Annuity providers hard we got it up to £14,072 per year. The client in question was 55, if he lives for another 25 years that’s over £100k in additional income. Needless to say the client was happy and as an aside, there was no debate over the value we added or our fee!

    The example, which is not isolated, shows just how much profit Annuity providers are making and how much margin they have to push up rates if they want the business.

    There clearly needs to be more focus on the profits being made from Annuities, but also more done to highlight the fact that many people shouldn’t be annuitizing and should consider other options, something which will never happen with online, automated, non advised services, which infuriatingly still get paid on a commission basis.

    Reply
    • Thanks Phil, completely agree. The concern is online solutions will most likely provide better outcomes than roll over, so fca will be happy. But will fall short I suspect of providing best outcomes.

      Reply
  • Dave, really excellent article.

    This line is particularly true: “But we are continually obsessed with shaving 5 to 10 bps of the price when growing the savings pots. Yet, no-one is really lifting the lid of the margins being made when it comes to taking the pot.”

    We recently wrote an article highlighting the fact that advisers (and retirees if they go direct) should always haggle with Annuity providers to ensure they get the very best rate. One of our advisers had a case where the best initial quote was £9,956, but after pushing the Annuity providers hard we got it up to £14,072 per year. The client in question was 55, if he lives for another 25 years that’s over £100k in additional income. Needless to say the client was happy and as an aside, there was no debate over the value we added or our fee!

    The example, which is not isolated, shows just how much profit Annuity providers are making and how much margin they have to push up rates if they want the business.

    There clearly needs to be more focus on the profits being made from Annuities, but also more done to highlight the fact that many people shouldn’t be annuitizing and should consider other options, something which will never happen with online, automated, non advised services, which infuriatingly still get paid on a commission basis.

    Reply
    • Thanks Phil, completely agree. The concern is online solutions will most likely provide better outcomes than roll over, so fca will be happy. But will fall short I suspect of providing best outcomes.

      Reply

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