Over the last four years, there has been a lot of activity in the outsourcing arena for life and pensions.
Companies such as Abbey Life, Barclays and Royal & Sun Alliance have all signed contracts focused mainly on the management of closed life books, where companies faced a rising unit cost as the in-force book decayed.
With the growth in the market, there has been a parallel growth in the number of companies, including UISL, Marlborough Stirling, Liberata, EDS and Capita, offering outsourcing services to the life and pension market.
It would be reasonable to conclude from the contracts signed so far that outsourcing is primarily appropriate for closed books in life and pensions. However, now that there is more attention on the new, low-margin, open-book world, the opportunities to reduce costs and effort must be explored in detail from all angles. Two contracts signed recently involved open books – EDS with Liverpool Victoria and Capita with Prudential International/St James' Place.
Our work with clients shows the complexity of the world into which life companies will be selling and it is obvious that effective use of technology is the only way that companies are going to be able to continue to operate viably and sell new business at a profit.
Naturally, back-office operational considerations are important but the open-book scenario means that you need to consider how any strategy adopted within the scope of the project would improve your ability to distribute products in the low-margin channel faced by the industry.
This factor has not been lost on outsource service providers and most are developing propositions to tackle issues further down the value chain at the point of distribution.
The picture of the life and pension market, particularly in the 1970s and 1980s, was one of vertical integration. Life companies owned the entire value chain from manufacture to distribution and after-sales service to fund management. This integrated world has proved to be untenable as the 1990s progressed, particularly with the breakdown of tied direct salesforces.
The integrated market supported elements of the value chain that did not add value. In fact, many distribution channels became value destroyers. This was as a result of huge inefficiencies in the integrated model that had built up, combined with poor practices in how life companies dealt with their distribution.
The current trend is tow-ards fragmentation of the value chain – credible offerings are in the market from big providers which started their life and pension operations with a closed book but are now building for the future and considering how they can support the open book world.
The outsource market is, therefore, not stuck in the back office and technology. The market is looking at the distribution infrastructure and considering how this complicated network of product providers and distributors can be connected efficiently and effectively.
The networks have also gone some way in providing what could be considered as outsource services to their member firms. Members benefit from the economies of scale by joining a network for IT, compliance and increased commission based on the purchasing power of the network.
IFA firms and multi-ties of the future face an even more complex world in terms of managing relationships with different product providers and keeping track of their clients' portfolio. This is a problem which life companies also face.
The option of providing a shared service infrastructure across the industry is unlikely – previous attempts at collaborative initiatives have not been successful. However, there are many companies with in-depth financial services knowledge, an objective view and the financial strength to create this infrastructure and, in effect, act as the logistics managers for the industry.
These companies are not only considering the issue of comparative quotes, straightthrough processing and client management but also commission and agency management to reduce this significant overhead.
From a smaller company's perspective, there may be a view that outsourcing is not appropriate due to low volumes or complexity of process. Offshore options are making these potentially smaller contracts more viable and companies are increasingly placing parts of their operations into an outsourced environment where the cost/ benefit makes sense.
The offshore opportunity is being applied to the back office, front office and distribution. For example, Prudential has set up an operation which will handle customer calls and back-office activity to complement its onshore operations and Sesame's business quality checking is also offshore.
For a market which is relatively immature, much has been developed over the last four years and the outsource suppliers are committed to providing viable solutions across the entire value chain and flexible solutions for their clients.
This provides even the most cynical among us with food for thought. Outsourcing, offshoring or transformation could provide the most appropriate model for your organisation. What we have now is choice across a compelling range of options.