View more on these topics

Life is a closed book

Life is brutal. For years, you take everything it throws at you, yet show no ill effects. Then suddenly it all seems to catch up with you. That once trim body starts to flag, showing clear signs of its past mistreatment. Oh, how you wish that you had invested earlier in keeping your body in peak condition.

For around 200 years, as stewards of personal savings and providers for family security, the trustworthiness of life companies was hardly ever doubted. But it is all looking rather sad now. Who would have thought that their solvency margins would be subjected to the level of scrutiny they are now?

IT budgets almost doubled during the prolonged bull market of the mid 1990s and even the insurance world felt free to indulge in internet fantasies. Life companies felt good about spending money on new technology that suggested a rewriting of the rulebook. Alas, the old adage held true – insurance (especially life and pensions) is sold and not bought. The future may have appeared bright but it turns out that it was just rose-tinted.

The paucity of current investment returns now dominates the decisions of every life company.

Undoubtedly, there have been questionable management decisions previously made in the face of an explosion of new technology choices and increasing consumer financial sophistication.

These are now combining to create situations where surpluses/profits are being squeezed to an extent that is seriously imperilling the future of many of them.

The pressure is now on life companies to take a hard look at the options available to them to reduce their expense ratios. While the past has been characterised by high margins taken from a wide range of complex products, mirrored by high fixed cost bases, the future requires life companies to make a profit from a smaller range of simple products with low margins.

The recent Sandler review, proposing a 1 per cent charge cap on new stakeholder-style products, means that, for life companies to survive, let alone thrive, in today&#39s market they must quickly find ways to cut operational expenses substantially – and not just stake- holder. Many companies are looking to address other products within these tight boundaries as well.

It is like a wake-up call for the body. Do something to redress the balance of your life, or you won&#39t last long. At the very least, get on a diet. But what is the smart diet?

Sandler pointed clearly at the cumbersome and inefficient ways in which most life companies handle existing business.

In particular, he highlighted the plethora of antiquated legacy systems as a major barrier to implementing the modern business processes that can help achieve the cost savings needed for the sub-1 per cent world.

Life companies can remedy this situation, starting with the old IT systems that run their closed books. Intense competition in the past drove every player to woo the customer with a succession of new, often short-lived, product offerings.

As a result, nearly half of all in-force life and pension policies are no longer available to new customers.

Most life companies now have to continue to administer these old products on isolated, old systems that rely heavily on manual support and business process work-arounds, and which are not conducive to providing the highest standards of customer service.

Often, these are written in a number of different programming languages and reflect business models and working practices that today have to be supported by various PC add-ons.

In the past, these systems have suffered from a continual lack of investment, as IT budgets have been directed into other areas which have been deemed more strategic.

It is clear that the area of closed books would benefit from urgent attention. It is a prime target for cost reduction, and one where substantial improvements to custo- mer service levels can be achieved at the same time.

Having decided on the area to target for rehabilitation, what course of action should be taken? This becomes a key strategic decision for each life company. Two of these options are:

•Outsource the entire closed books operations (that is, the customer contact and policy servicing, as well as the IT infrastructure), to a third-party administrator that will run the business according to a pre-agreed cost structure;


•Continue to administer the closed books in-house but migrate to a lower-cost platform and make changes to ensure that ongoing policy administration is more cost-effective than it was before.

But whether the outsource or the in-house option is better is a question that does not have a universal answer. It is all about business strategy and understanding what drives value.

The question that life companies should really ask is how technology can help them get where they want to be and where it can help take cost out of the operation.

A reduction in the cost base for running closed books can be achieved by economies of scale in IT, reducing the number and complexity of systems, either by using a technology-based TPA or by retaining a system in house.

A demonstrable improvement in customer service can be attained by the increased automation of in-force policy maintenance and claims&#39 processing in particular, with further cost reduction achieved through improved business resource utilisation.

Whether in-house or not, a single solution on to which a life company can migrate all its closed books and administer them at a reduced cost is surely a very attractive solution.

Now is the time for these options to be properly explored. What is needed is a system of processing closed policies that provides rich functionality for policyholder, policy and premium administration during the lifecycle of the policy through to final payment processing on death or maturity. This solution must be made readily available both to end-customers and intermediaries.

Companies should seek out a solution for their closed books that reduces total costs of ownership, improves customer and intermediary relationships and strengthens them for whatever life throws up next.



The Diary&#39s favourite read has to be The Actuary and not just because of this month&#39s riposte to the BBC&#39s Great Britons debate, the Greatest British Actuary Ever poll.Yes, it&#39s the puzzle section. Full of mathematical problems, mile-long formulae and anagrams, it is the equivalent of page 3 for the actuarial profession.Actuary puzzle – five […]

Clerical Medical International – Growth Lock-in Fund

Monday, 10 March 2003 Type: Capital guaranteed fund Aim: Sterling &#45 growth linked to FTSE 100 and JPMorgan UK government bond indices, Euros &#45 growth linked to Dow Jones Eurostoxx 50 and JPMorgan Eurozone government bond indices, US dollars &#45 growth linked to S&P 500 and JPMorgan US government bond indices Minimum investment: £15,000, Euros […]

Standard slams rivals on &#39manipulated&#39 FARs

Standard Life has hit out at rival insurers for manipulating free asset ratios while accepting that it has used new bases for calculating its own.Analyst Ned Cazalet has criticised Standard for using different criteria to calculate this year&#39s FAR despite admitting to an investment loss of £4bn.Standard&#39s FAR has increased to 8.9 per cent excluding […]

CIS wants Govt to raise insurance Isa limits

CIS is calling on the Government to raise insurance Isa contribution levels if it is serious about creating a level playing field between life offices and fund managers.The company notes the wide anticipation that the 5 per cent tax deferral rule on life bonds will be axed in the next Budget.Last year&#39s Sandler review argued […]

Where next for the price of oil?

Having stabilised at around $65 a barrel, many investors are questioning if the price of oil will rise, and when. Richard Hulf provides his view. Richard Hulf, manager of the Artemis Global Energy Fund, sets out his thoughts about how the oil price may move through the next six months. At the start of the […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm