Expect Changes In SPIA Commissions, Underwriting

As more companies begin underwriting SPIAs, the remaining companies will be forced to do so also–or face anti-selection from customers who gravitate to the best SPIA rates.

The best rates for those in poor health generally will be offered by insurers that underwrite. The best rates for those in good health generally will be offered by insurers that do not underwrite but expect a mix of healthy and unhealthy annuitants. (If these companies receive mostly healthy annuitants, the profitability on their SPIA business will deteriorate.)

Insurers may be reluctant to underwrite SPIAs because little mortality data are available to classify annuitants into risk classes. Until this data becomes available, actuaries will have to price these SPIAs based on judgment concerning expected mortality rates.

Underwriting SPIAs will change the sales process. For example, the travel time from completing the application to policy delivery will be extended due to the added underwriting time. Also, insurers may add incontestability clauses to their SPIA contracts, forcing representatives to explain additional contract provisions to annuitants upon policy delivery.

Also, when purchasing life insurance, applicants typically present themselves in the healthiest light. But when purchasing SPIAs, they will have the incentive to present themselves in the unhealthiest light in order to be placed in the risk class making the highest monthly payout.

Table 1 illustrates why this is so by showing the monthly income for a $100,000 SPIA that is payable for life for a male and a female, issue age 65. Values in the table are based on a 5.5% earned rate and the Annuity 2000 Basic Table, a mortality table often used in determining SPIA income values. Mortality is assumed to improve at 1% a year for males and 0.5% a year for females. A standard annuitant is based on 100% of the mortality table.

The Table shows that underwriting SPIAs may result in much different monthly income values for annuitants of the same issue age. For example, the Table shows that insurers that currently do not underwrite their SPIAs may offer a monthly income value of $713.06 for males and $667.69 for females in the test scenario. If, however, the annuitant has medical impairments resulting in twice the standard expected mortality (200% of standard), the monthly income values increase to $873.08 for males and $781.85 for females.

This is a monthly income increase of 22.4% for males and 17.1% for females.

If we assume that payments are paid for the life of the annuitant, but not less than 10 years, the values change as shown in the Table II. Consumers often choose this type of SPIA, preferring the guarantee that they or their beneficiaries will receive payments for 10 years. The Table shows that the addition of the period certain to the monthly payments lessens the effect of underwriting.

Therefore, in the future, expect SPIA sales to increase. Also expect SPIA companies to change the way they compensate agents for SPIA sales, and to change the way they underwrite SPIA applicants. While little, if any, underwriting is currently performed, future SPIAs may have much more extensive underwriting.

Kent C. Scheiwe, FSA, MAAA, is a principal in the Indianapolis office of the Milliman USA actuarial consulting firm. His e-mail is [email protected].

Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.