- Don’t show your organizational weaknesses to the customer. You may be siloed, but that shouldn’t make it difficult for the customer.
- Make sure your support people actually know what they’re doing. The solution set should not include “making something up so the customer will go away.”
- Customers expect your service to equal those of other providers. Admitting that you’re not Amazon just reinforces this notion.
More Q&A following our webinar on the Strategies and Options for Managing Closed Blocks: Life, Pension and Annuity Edition
Since Karen Monks and I held our webinar on the strategies and options for managing closed blocks, we have had a number of follow-up questions. We’ll aim to answer as many as possible in this blog.
If you any further questions, then please do not hesitate to contact us directly.
What regulatory /compliance problems do insurers foresee while migrating to BPOs/TPAs for closed blocks in the US?
When an insurer considers BPO / TPA as a solution, most regulators around the world express a keen desire to stay close to the decision making process. In some countries, there is also a requirement to notify the regulator as well as the policyholder. At the centre of the regulators’ concern is to ensure the fair treatment of the policyholder and, increasingly, to also ensure that their information, as well financial assets, are secure.
In the US, TPAs increasingly are required to follow many of the licensing and record keeping rules that insurers must follow, thus an insurer would do well to understand the guidelines under which TPAs must work in each state. The insurer will want to ensure that the TPA selected is compliant and protecting the security of the insurers data and information.
Another issue that insurers noted as a result of the compliance and regulatory requirements related to notifying policyholders of the use of a TPA was the potential for some sleeping policies to awaken. This may cause an uptick in claims as beneficiaries come forward.
Many insurers that we spoke with recommended engaging the regulator early in the decision process; as this was considered key to obtaining early guidance and also helping to manage their expectations throughout the process.
Do you have a sense as to the number or percentage of insurers who see their closed blocks as a ‘problem’ (i.e. that they can’t manage, are losing staff who can support the product, the costs are escalating etc)?
Not as a number or percentage. Through our interviews, it was clear that economic uncertainty, low investment returns and the availability of capital to support generous product guarantees are behind driving an increased interest in the topic. Unfortunately, only those who have gone public with a decision already or are currently in a distressed state can be identified easily as having a ‘problem’.
In our survey, it was interesting to see that many insurers see expense reduction, releasing capital and avoiding management distraction as three of the main reasons for pursuing a strategy. Additionally, nearly all insurers that we spoke to were actively investigating the issue, although some were clearly further ahead in their thinking than others. Those insurers we spoke to without a burning platform appear to be just entering their strategy definition phase.
What were the roles of the individuals interviewed for this study?
They were all senior managers within their firms (i.e. Head Of, VP, Director), with a responsibility for strategy, operations or IT.
What would an administrative reinsurance strategy be classified according to this study, Divest (sell-off)?
This proposition is a mix of liability offset (via the reinsurance arrangement) together with a BPO arrangement. Many reinsurers use existing BPO players in the market to provide the administrative service for them. Consequently, when considering options and depending upon the business drivers, it may be a good idea to evaluate how a pre-packaged proposition from a reinsurer versus a component solution compares.
Are you aware of any real success in the UK or Europe with the convert/buy-out option?
Conversions and ‘buy-out’s are tough. Ultimately, success depends on gaining agreement of every policyholder sitting in a closed block on a system to agree to the conversion / buy-out prior to being able to decommission the platform. These strategies can also attract a significant amount of regulatory oversight as they aim to ensure that policyholder interests are not being impacted unfairly.
Unfortunately, in our experience, this is not a well-documented area with many success stories that can be referenced. The largest and most notable examples tend to come from distressed insurers or funds where the policyholder is left with the choice of either accepting lower guarantees or investment performance in exchange for financial stability, or have the insurer or fund face bankruptcy.
Are companies considering BPO+ITO as an option to outsource or is it individual BPO and ITO only?
Unfortunately, there is not a ‘one size fits all’ for the market and the solution will depend to a large extent on what agreements the insurer already has in place, such as pre-existing ITO agreements, and how much outsourcing has already occurred. Consequently, insurers are still looking at both options.
From our perspective, there are a growing number of propositions being developed for BPO+ITO in the market, albeit targeted largely at satisfying a specific product type, such as Annuities, Protection, LTC or pensions. The trend is to market these propositions on an ‘as a service’ or outcome based model enabling the insurer to move onto a variable cost base quickly and achieve a degree of certainty over future costs.
Did you find any cases where a company had outsourced to a supplier and then taken it back at end of contract? Is it even feasible to take back a block if supplier and insurer decides it doesn’t work?
No. We did not research this specific issue. However, you are right to raise this as a concern. Any insurer considering a BPO option (especially where replatforming is involved) should consider carefully how they plan to exit the BPO contract should performance not meet expectations or as a result of a change in strategy. We recommend that this question be addressed early as part of an RFP and effective due diligence activity. If replatforming, it’s an essential consideration to understand the approach to migrating off the platform and, where relevant, the transfer of technical IP alongside it.
Does Celent have any example organisations in the UK and US that have successfully reduced costs of back books through technology transformation?
Yes. Please look at Celent’s report entitled ‘Seven lessons from a successful platform transformation’.
Have you seen any examples of successful technology transformations without BPO?
We are writing a Solution Spectrum report for release later this year. In preparation for this report, we have asked consultancies, BPO service providers, system integrators and software vendors to provide us with brief case studies on this topic as we recognise this is an area of interest.
Certainly, there are successful platform transformations and projects involving decommissioning or wrapping systems as we hope that these case studies will show. However, it is often difficult to look at these cases in isolation without considering the wider impact on business strategy and supporting business models.
What are the key differentiators that insurers look for in a vendor when they consider the technology transformation option?
A great question. Unfortunately, we did not ask this question in our research so cannot answer categorically.
However, the primary drivers cited for technology transformation include expense reduction and removal of the technology obsolescence risk. Consequently, based on our other research into related topics, it is reasonable to assume that insurers are likely to be focused on the ability to reduce costs quickly, the ability to reduce the risk of obsolescence, and long-term flexibility.
Is there a business case for technology vendors to invest in creating a standardized methodology for addressing closed blocks of business?
This is a ‘it depends’ answers. There is no ‘cookie cutter’ approach being marketed currently. Some vendors have acquired or are aligning their existing capabilities to address the closed block issue. The more advanced propositions have aligned common insurance frameworks and methods with their technical assets to support the process.
What platforms are you seeing being most used to host closed blocks?
From what we have seen, there is no single platform that is becoming the default for hosting closed block business. Although many BPO providers will standardise on a single platform for their operations, this platform together with all of the dependent systems differs between each competitor. However, there are a few platforms that appear to be at the heart of operations for managing closed blocks. Among others, these include: Accenture’s ALIP; CSC’s product suite of CyberLife, WMA, Integral and AIA; Infosys McCamish; TCS BaNCS; and many more home-grown or inherited solutions.
When selecting a platform for closed blocks, the reality is that BPO providers and insurers still need to take each decision about a closed block individually and evaluate the RoI for moving specific product groups versus retaining them until run-off. Until successful migrations become part of the fabric of normal IT operations, there is likely to be a number of platforms running in concert for a little longer.
You said in the webinar that this was mainly an older mature market problem today. When will we see the same issue arising in younger / emerging markets?
Our view is that it is inevitable that the same issues will be experienced elsewhere in younger and emerging markets unless those markets consider the lifespan of these products from the outset at their design stage and put in place strategies to anticipate product longevity and the run-off. The good news is that these markets have the opportunity to learn from developed markets and not to make the same mistake of focusing too heavily on new product launch without actively managing product retirement.
Also, it is important to note that software and systems integration methods have matured enormously over the last 10-20 years meaning that the technical risk of transformation and large scale data migration is much reduced, although it should be noted that the project risk around poor execution and leadership may still be present.
Successful transformations and migrations are possible and no longer a CIO’s bravest decision.
I read with great interest the article in The Wall Street Journal today about bioprinting (http://online.wsj.com/article/SB10000872396390443816804578002101200151098.html?KEYWORDS=3d+printing). This offers great hope for critically ill patients and possible future relief for those of us whose natural sinews are reminding us of the law of entropy (read aches and pains). It also should give some pause to actuaries who are forecasting mortality tables for the next fifty years.
The article explains a little about this experimental printing technology that gave me a clearer picture than I had previously had of what printing body parts is really like. The article states, “in lab tests, bioengineers printed…patches of beating cardiac muscle” and “scientists are printing small 3-D clusters of liver cells suitable for toxicity testing.”
The possibility of printing body parts will offer additional challenges too. These are more of a social kind, particularly once the production of such moves into wider use. My mind wandered back to my cubicle days in an insurance company headquarters where thirty or so people shared a network printer. I remembered the cold sweat that broke out when I printed my Final Four Men’s Basketball Tournament bracket and ran to the nearest printer to find that it was not there. “Oh no, where did I last print a document? Ooops, was that the color-coded project Gantt chart using the advanced printer next to the CIO’s office? Arrggh!”
Imagine what complications will arise as researchers begin to share these expensive printers. I can hear the complaints now: “Bob went to lunch and left a beating heart on his desk again and I can’t shut it up. It’s really getting on my nerves and I can’t concentrate on my work.”
Every network printer naturally has a graveyard of documents next to it, you know the stacks of unclaimed, abandoned printouts next to it. In the future, these will be real graveyards, piled with miscellaneous body parts looking for a home.
Then there will be the opposite problem of the body snatcher. We have all had that critical, confidential piece of printed work that was picked up by mistake (or, in more ruthless corporate cultures, on purpose) by someone else. What happens when you print a couple of arteries and go to the printer to find them gone, swept up with the stomach and intestine bits produced just prior? Do you hit print again, or begin a search of the floor to find the wayward tubes?
Finally, there is the infrequent user problem who has a private printer in their office (this is usually the boss). On the day, the personal printer is out for repair and the administrative assistant is not at their post. Boss needs just two copies of an important piece of work. Since the boss doesn’t use any kind of printer very often, confusion results and instead of printing 2 copies, he/she prints 200 (typing numbers into that little box next to “number of copies” is so hard!). These days, no problem if 198 copies of a graph are tossed into the network printer graveyard. But, what do you do with 198 fingers, legs, or knees?
I shudder when I think of the mass confusion and hysteria coming, but am sure that, somehow, Office Administration will work out an elegant solution.
Please reply with your horror stories in the land of Frankenjet. In the run up to Halloween, we’ll do a follow up post of the best ones received!
Last week, the Hartford (USA) announced that it was refocusing its business strategy. The immediate impact of this change was to place its annuity business into runoff, and to initiate a search for a buyer (or strategic alternative if a buyer cannot be found) of its Individual Life, Woodbury Financial Services and Retirement Plans. In addition to this news from the Hartford, earlier this month we also saw the Prudential (USA) announce that it was going to discontinue the sale of individual long term care products.
In mature markets around the world, there appears to be a growing demand to either find new homes or alternative strategies for long-term business that no longer fits with the business strategy of insurers. In Europe, for example, Solvency II and local market reforms (such as the Retail Distribution Review in the UK) are acting as a catalyst for insurers to re-evaluate the economic viability of running these blocks as they reduce in size with age, and also with a view towards releasing capital.
So, if you’re an insurer with large block of non-strategic long-term business, what are your options?
The most obvious option, and preferred by many, is to find a buyer for the block. Although strategically, this can be the cleanest option for the insurer, it comes with two big risks. The first risk is brand reputation. Even though the products within the block may be viewed as non-strategic by the insurer, it is unlikely that the customers holding those products see them that way. Ultimately, these same customers may also be good prospects for other financial products and services. The second risk relates to transition. Ideally, the buyer of the closed block needs to be able to absorb the business into its existing operation without a drop in service quality or benefits to the customer. Typically, this will involve some level of convergence on processes and platforms with other similar blocks – not an easy task, and it is likely that the biggest share of the reputational risk associated with any failure still lies with the insurer who sold the block!
Other options range from financial restructuring through to outsourcing through to internal transformation. No option is straight forward, all involve some level of balancing the cost to serve with the reducing size of book, and all attract risk. Arguably, at the heart of any good strategy for closed blocks, should be an understanding of the value of the end customer holding the product, and how further value can be extracted from the relationship to the benefit of both parties (regardless of who manages / owns the block now).
At Celent, we are researching the options open to insurers for managing closed blocks and also strategies for maximising the value of the customers held within them. If you have an opinion on what the best strategy is for managing these old discontinued blocks of business, then we’d be keen to hear from you.