John Hancock introduces Vitality in the US – will it transform the industry?

John Hancock introduces Vitality in the US – will it transform the industry?
Bold words, perhaps. Transform the industry? It just might. If you did not see the announcement, you can learn more about the program at the John Hancock Vitality website. If you participate in their program, you can receive rewards and premium savings. The program rewards healthy activity, regular exercise, regular checkups and even reading about topics John Hancock offers. It is a program that will feel familiar, as it works similarly to other retail rewards programs, but is focused on your life style. That’s one of the benefits – it is simple and easy to use. The rewards partners are quite extensive as well. In other words, a win-win. The insured lives a healthier lifestyle and is rewarded for it. The insurer benefits as their customers live longer, which is to their financial benefit. I love a good win-win. The program is not actually new. It’s been in existence, in earlier forms, for a number of years. It began in South Africa, with Discovery Vitality, then moved to the UK and to Asia. What makes it even more interesting now, is the intersection of an innovative program with technology. We have all seen technology in the fitness space. You cannot walk around a mall without seeing a Fitbit. For those that think this is a phenomenon only focuses on youth, look when you go shopping. Wearable tech is on the wrist of every age group. Celent certainly expects that to grow quickly, given the upcoming release date for the Apple Watch in the US. Today is even the day you can see one in your local Apple store. The Vitality program integrates this information directly into the rewards, giving you credit for the exercise, just by virtue of reporting it. There are some questions, and I was asked some of those on CNBC’s Nightly Business Review program on Wednesday night. You can view the interview here. Some are fairly obvious – such as security. We don’t see that as an issue here, as the information shared is very limited and not information of interest to a hacker. How much I walk and my heart rate is just not valuable information to anyone. Let’s also not forget that programs with similar components are in place today in the health insurance world. Many companies offer discounts to their employee’s insurance if they complete some basic steps. Our parent company does and my family saved a significant amount of money by participating. One better known program is Humana’s Vitality program – yes, there is Vitality again. Another could be concern that this would limit Life insurance, or even subject you to cancellation, if you didn’t meet your fitness goals. Again, that’s not really an issue. The contractual obligations of an insurance company are very clear and neither this program, not the contract, allows that to occur. The program is also entirely optional. In fact, what industry should we trust more than the Life insurance industry? The basic premise of life insurance is spreading risk. We pay our premiums, for years or even decades, and expect our loved ones to be taken care of in their times of greatest grief. And they are, and have been for centuries. It is one of the reasons I like being in this industry – we help those that have just been stunned by loss. Readers of earlier blog posts know that I enjoy technology and own and wear a very high-tech watch. I am all set for this program and many of you are too. One of my reports from last year explored this very topic, and referenced Vitality as an example. I’m pleased to see movement on the topic, particularly by a company as strong as John Hancock. I encourage those that are interested to follow some of these links, and check out my interview, to learn more about the program. I am sure we will have more soon.

More Q&A following our webinar on the Strategies and Options for Managing Closed Blocks: Life, Pension and Annuity Edition

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.

Printing Body Parts: Frankenjet??

Printing Body Parts: Frankenjet??

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!

Is there any life left in those old (life) blocks?

Is there any life left in those old (life) blocks?

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.

A new and innovative way to issue life insurance? Is that possible?

A new and innovative way to issue life insurance? Is that possible?
Hartford Life just introduced Issue First, a new way to provide immediate life insurance protection. Get this . . . the policy is issued before underwriting. The upper limit on face value and age is $2 million and 66, respectively, so they are not just targeting small policies or young insurers. The Hartford estimates that on average it takes 48 days to issue a permanent policy; that’s almost two months! But with Issue First, the policy is issued in as little as five days if the answers to eight medical questions meet the eligibility requirements. The Hartford’s agents must be loving this. Five days. That’s a huge reduction in time for the prospective policyholder. For The Hartford it means fewer withdrawn applications. And, from what they have found in a historical review on non-Issue First cases that 95% of the time, a final Issue First rate would have been the same or better than originally illustrated. For the policyholder it means immediate life insurance coverage without a higher price tag. At the completion of underwriting, the policyholder can accept the final rate, which may be the same, higher or lower than the initial illustration, or exercise a free-look and receive a full return of premiums. So why is this so new and innovative? Well, first I don’t know that anything like First Issue has been done before. It’s changing the way that insurance has been issued for decades. Second, the Hartford analyzed the wealth of data they had to determine that the risk of this process was worth undertaking to speed up the policy issuance process and to grow their business. Lastly, they are changing a process that they see is unfriendly to prospective policyholders even if it means that they are disrupting the way they have always done business. Disruption. Innovation. Words that are not normally attached to insurance. Celent recently hosted a Creative Disruption Workshop in Boston where this topic was discussed. See the video: http://vimeo.com/31409934 Although innovation and disruption are not typically associated with insurance, there were several examples presented where both have happened. For example, Progressive changed the way car insurance is priced which in turn has had a lasting effect on the industry. Telematics and ‘pay as you drive’ is changing how car insurance is underwritten and priced. Forward looking ideas like replacing a call center with a Watson like system were suggested as potential future disruptions. Hartford Life’s Issue First can be considered another such example. Can you think of other examples? I’d like to hear of them. And if your example has an IT project associated with it and you think it is worthy of an award, why not nominate your insurer and the project for Celent’s 2012 Model Insurer Awards. Nominations are being accepted now at https://oliverwymangroup.wufoo.com/forms/celent-model-insurer-2012-selfnomination-form/.

Insurance and Japan

Insurance and Japan
One might naturally assume that the tragic events in northeastern Japan would also be devastating the Japanese insurance industry. By the beginning of April some 320,000 P&C claims related to the disasters had already been filed with insurers. After the Kobe earthquake of 1995, when many home and business owners discovered their policies did not cover the damage, people got in the habit of buying earthquake / tsunami insurance. So fortunately more properties were insured on 3/11 than may have been otherwise. In conversations with Japanese carriers, however, Celent has found that insurers are remarkably sanguine about the likely effect on the industry here. Firms say they have adequate reserves set aside precisely to cover an event of this magnitude, which has long been predicted. As a result, Celent expects that major Japanese insurers will continue to invest in strategic initiatives to boost competitiveness and lower costs in this very crowded market. IT spending growth at Japanese insurers, which has been close to flat for years anyway due to the maturity of the market, will suffer a modest dip in the short term. Smaller insurers are likely to put off renewal projects for a while. Pressure to merge will increase at some firms, but again the industry has seen a spate of consolidation activity in recent years already. The recent events are likely to encourage Japanese insurers to accelerate their international expansion efforts, which are already underway. Carriers have been looking abroad for growth opportunities, especially to the Asia Pacific region but further afield in the Americas and Europe as well. In Tokyo, along with the concern, there is a new competitive spirit in the air. April is the start of Japan’s fiscal year and businesses look determined to find ways to grow even as the economy is forecast to contract. The insurance industry would be no exception. For example, the past year has seen the emergence of new internet and mobile based distribution models and products, approaches which seem almost tailor-made for the post-3/11 era. Technology suppliers will want to know that amplified interest in business continuity is leading insurers to think seriously about cloud computing. The blooming sakura and early spring sunshine might be distracting me from some of the harsher realities of 21st century Japan. But certainly a little optimism is not misplaced in what is after all one of the world’s major insurance markets.

Can mid-market expansion happen with the newest generation of new business and underwriting products?

Can mid-market expansion happen with the newest generation of new business and underwriting products?

Will automated underwriting systems finally replace the underwriter for term life insurance products? Could these systems be the catalyst that finally allows life insurers to penetrate the ever elusive middle market? I think both answers are “maybe.”

Today’s new business and underwriting systems offer broad functionality for the producer and the underwriter. Reflexive electronic applications, instantaneous third party data integration, and risk related configurable underwriting rules all can help the producer to potentially issue a larger number of policies instantly.

The newest generation of new business and underwriting systems offer electronic applications that give early insight into how much medical underwriting is needed on a case. Using insurer defined rules that assess risk and reflexive questioning, the system determines what, if any, medical underwriting requirements are needed. Because the system evaluates the risk, the application may never be seen by an underwriter. That’s because for many term products up to a certain face value, the insurer’s rules may rely solely on instantly accessed third party databases. According to Celent’s research, this currently happens less than 25% of the time, but the capability is there to expand the use of these systems to meet the needs of the middle market and at the same time lower the cost of issuing lower face value policies.

The recession has meant there is a larger percentage of the population on the lower end of the income spectrum than ever before. This has important implications for life insurers since more people may look to buy lower face value policies. These applicants demand lower premiums and faster issue times. To streamline the application to issue process and to meet these demands insurers can look to today’s new business and underwriting systems with their straight through processing (STP) functionality and their potential advantages in reducing the cost and time associated with insurance sales and underwriting for all policy types.

The newest generation of new business and underwriting system can also give an insurer deeper insight into its own underwriting rules. The data analytic capability of the system monitors system behavior so insurers can make immediate risk related rules adjustments. If the access to data helps push the level of reliance on the underwriting engine by increasing instant issue policies, the new business and underwriting system could pay for itself through operational savings. Although overly simplistic, using data from Celent’s discussions with life insurers that actively use a new business and underwriting system, a 10% increase in simplified issue policies (assumes the switch of approximately 525 policies from medical underwriting to instant issue with savings of $.40/$1000 per new business face amount) could result in savings of approximately $100,000 per year. That’s a potential break even in four to five years for some vendor systems available today.

According to a Society of Actuaries 2010 study, automated underwriting has been fairly successful for life insurers who use automated underwriting for simplified issue and non-medical underwriting, and to a slightly lesser degree for flagging pieces of information in the underwriting process for review by an underwriter. If an insurer can get past the cultural issues related to using automated underwriting systems, and as long as it does not try to replicate all medical underwriting with an automated system, true benefits will be seen. So, underwriters will still be needed for term products, but to a lesser degree, and the growing middle market has the potential to be penetrated further than ever before.

For further reading on the new business and automated underwriting systems available in the North American market today, read Celent’s North American Life Insurance New Business and Underwriting Systems, 2010: Life, Health, and Annuities ABCD Vendor View.