Increasingly when you encounter senior impaired risk clients or prospects, you can feel confident that you can deliver good news to them.
Thats because you can offer them what is being called “impaired risk annuities” or simply “impaired annuities.” These are single premium immediate annuities (SPIAs) that give clients a larger payout if they have a health impairment that increases the likelihood of having a shortened life expectancy.
Given the growing boomer-senior market, these products may become increasingly important to your practice.
Until a couple of years ago, impaired annuities generally fell into two broad categories: structured settlements and what might be called moderate impaired annuities.
Structured settlements are used for legal/tort settlements. You wont be talking to clients about them unless you specialize in that market. They are not the focus of this article.
Moderate impaired annuities are regular fixed life contingent single premium immediate annuities written on people with neither minimal nor high levels of impairment.
The moderate impaired limitations arose mainly from the reserving standards. The reason for that is technical, but you should know some of the detail in order to understand the market in which these products now exist.
Here is a brief overview. The reserving standards grew out of concern about insurers offering better rates to impaired individuals and reflecting this in reserves on these lives. The concern was that the total payout annuity reserve liabilities would be reduced unless the reserving basis for non-impaired SPIAs was correspondingly increased.
Here is the complication: The latter would make regular SPIAs more expensive (assuming data could be made available to create a new reserving basis for non-impaired SPIAs).
As a result, insurers limited their offerings: on the high side, because of the reserving strain of having to hold full standard reserves for impaired cases; and on the low side, so as not to compromise standard SPIAs by reclassifying mildly impaired risks who were still open to buying regular SPIAs.
This brings us to current times. The reserving constraints started to change a couple of years ago. On the reserving side, an Actuarial Guideline IX-C was developed. This allows lower reserves on regular impaired annuities with this key proviso: A “medical assessment must support at least a 25% reduction in the expectation of life.”
The upshot? Lower and appropriate reserves now can be held on these cases without compromising standard reserves. This is because it is assumed the 25%+ cases are unlikely to have bought standard SPIAs.
It is true that most insurers are moving cautiously in this market. They point out that demand for these products has started to grow only recently. Also, many annuity insurers lack experience in underwriting the more highly impaired cases and in pricing the risks involved. Reinsurers also have been slow to come to the plate and for similar reasons.
Still, availability is growing and will likely continue to do so as insurers resolve these issues. Here are some trends to follow:
Expanded Offerings. You will now find offerings in two other major facets of the senior market. These are: the under-25% impaired seniors, and the very highly impaired seniors.