The brutal environment
Life insurance carriers today face daunting challenges in all operational areas by a number of phenomena happening around them in areas such as new legislation, compliance, and convergence with the financial services industry. The advent of the Internet and the empowerment that it has given to the customers does not help profitability either. The fight that the life carriers are fighting is not just for profitability but for survival itself. The economic slowdown and increased claims from terrorism maybe offset somewhat by the renewed interest in life and annuity products, but are not enough to enable the carriers to meet the goals set by their new owners as they demutualize.
What are Closed Books?
Closed Books are policies that are no longer sold but are still on the books of a life insurance carrier as premium-paying policies. The hardware and application maintenance costs for the systems that run the life closed books are high because they are often run on antiquated systems that have been starved of new investments based on these systems not being strategic to the direction of the carrier moving forward. Life closed books after all are caused by either discontinuing unprofitable products or as a result of acquisitions and mergers.
New avenues for cost-cutting
The progressive carriers are looking for cost savings, operational efficiencies, and ways to get closer to their customers, in more than just the usual places of new business processing, agent servicing, and claims. Life Closed Books is one such new area that has been receiving their attention lately.
Why aren’t more carriers managing closed books smarter yet?
Life Insurance carriers break-even on a typical new product only if the customer retains the product and pays premium for 7 years. The cost of managing closed books of business after these 7 years is low relative to the effort involved in processing new business. Acquisition of new business is expensive and thus the attention of most insurance carriers is drawn towards the low hanging fruit of reducing non-commission new business acquisition unit costs. This creates a sense of complacency in attacking a potentially ripe area for cost reduction namely managing the closed books smarter. The solutions exist. Now is the time for action for those few progressive carriers.
A large life insurance company typically has 500 closed books and 100 new products, which run on 50 disparate systems that were created to quickly roll out new products decades ago. The functionality required in a system for closed books is different than the one used for new business processing. The carriers have several options as solutions for reducing costs. They could:
- Buy-out policyholders
- Outsource closed books management
- Redesign business processes
- Rationalize systems that run closed books
- Replace old systems with modern systems
The benefits and rewards
Those carriers that optimally manage their closed books will be able to reduce costs, improve service and also reserve ratios. These carriers will also be in a much better position to sell new products to their existing customer base as also their family members, employers, as well as colleagues.
About the author
Raj Vaswani is the Director of Insurance Solutions for Sapiens Americas, a division of Sapiens International Corporation N.V. Raj has over 20 years of Management Consulting, and Insurance industry line management experience. Prior to joining Sapiens in 2001, Raj was a Principal in the Insurance Practice at IBM Global Services. He has also served as a Senior level Manager in the Insurance Industry E-Commerce Practice for KPMG Consulting. Raj has held line management positions at carriers including Allstate, AIG and MetLife. He is a recognized media source on the topics of e-business and technology in the Insurance industry and has been quoted in leading publications like Information Week, Financial Net News, and Insurance Network News. He has also spoken at several conferences about the impact of technology on the Insurance industry. Raj can be reached via email at [email protected]