U.S. insurers might be able to increase sales by developing more annuities for consumers with relatively short life expectancies.
Researchers present that argument in a new report on “substandard annuities,” or annuities for individuals with health problems.
The authors include 3 researchers from LIMRA International, Windsor, Conn., along with researchers from the Society of Actuaries, Schaumburg, Ill., and the Chicago office of Ernst & Young L.L.P.
Today, only 9 U.S. insurers sell substandard annuities, and only 1 of the issuers has been in the substandard annuity market since the 1980s.
The existing substandard annuity market already is highly competitive, and sellers seem to focus on marketing large, relatively risky substandard annuities for use as vehicles for paying the premiums for products such as long term care insurance, the researchers write.
Although only 4% of the immediate annuities sold in 2004 were substandard annuities, the substandard annuities generated about $600 million in premium revenue in 2004, or about 10% of the total, the researchers write.
The low-volume, high-premium nature of the current substandard annuity market could be a challenge, the researchers write.
“The profitability of the business may depend on the longevity of a few individuals rather than a large group,” the researchers observe.
Insurers also face the risk of dealing with uncertainty about annuity applicants’ health, researchers warn.
Individuals with acute conditions, such as quadriplegia, “may have much lower than average life expectancy for a certain period following the onset of the condition,” the researchers write. “However, if the person survives beyond this period, his or her life expectancy may improve significantly.”
But the researchers point out that United Kingdom insurers already are profiting from selling a wide range of substandard annuities.
U.K. insurers have introduced many narrowly tailored “enhanced annuities” designed for specific members of the substandard market, such as smokers or people with serious health problems, the researchers write.