Our last blog post discussed how organizational strategies do not always align with the time spans of the products produced to support those strategies in the life and pension industry. The issue of how to manage Closed Books business without compromising New Business strategy has been around for a decade, and organizations are unlikely to stop accumulating Closed Books in the near future, unfortunately.
Technology is accelerating the speed at which new products and new approaches to selling those products are required – today’s digital world is fundamentally different from the world of yesterday. Economically, consumers are looking for opportunities to invest their money, many of which will be provided by new insurance/investment products.
What should life insurers do about the “Closed Books problem”?
In short, another product development cycle is beginning and today’s products will soon become tomorrow’s closed books. One of the leading analyst organizations, Celent, believes that many insurers will begin considering alternative accelerated solutions involving either the sale or transformation of the business that supports the closed books.
“With a growing market of mature and proven capabilities consisting of options to both variabilize costs and contain liabilities, insurers can no longer say that there is an absence of viable alternative strategies,” said Jamie Macgregor, senior analyst with Celent’s EMEA insurance group.
There are a growing number of proven technology propositions that can be employed as part of a transformation, without the need to sell or outsource the problem. This is important, because legacy policy administration systems are costly to support and not best suited to deliver the changes required of today’s market. The costs associated with IT maintenance and support personnel for multiple systems are high and the business resources required to support the patchwork of systems often result in duplication of effort.
There have been many takes on how to manage what is called the “Closed Books problem.” “New Businessing” out of trouble has been the traditional approach for many organizations. This is the idea that an organization can continually build new business capabilities that are relevant to the current market needs, while allowing their Closed Books to stockpile. This strategy is fraught with risk (and seldom achieved), as the Closed Books and the attendant legacy systems simply accumulate until they become unmanageable…
An alternative is to sell the book. This certainly removes the legacy obligation, and immediately allows the retiring of the systems that support those books, reducing the fixed cost overheads. But, selling the book usually doesn’t take into account the true value of the business – in addition to the loss of financial assets (and the attendant financial strength they provide), this approach also sacrifices a potentially lucrative/captive client database.
In the past decade, Business Process Outsourcing (BPO) has been the de facto choice for managing Closed Books, and this not necessarily a bad solution. BPO enables the insurer to offload the servicing obligations, but retain the financial strength of still owning the book of business. BPO, however, does not provide a long term solution, since the consolidation exercise is seldom completed, and insurers are often faced with a return of the same infrastructure upon completion of the BPO contract (albeit a smaller book due to run-off).
The real reason that these approaches have either failed, or at best been a qualified success, is an underlying assumption that, “Closed Books are a problem.” The conflict between New Business strategy and Closed Books obligations is indeed a challenge, but we believe an “Old Co-New Co approach” enables an insurer to treat them as equal, but different, aspects of the organization. To find out more about this approach, please have a look at our white paper.