Closed Books Outsourcing - what will the future have in store?
Over the last two years there has been increasing dialogue and viewpoints on Closed Book outsourcing. 'Closed book' refers to policies and variations of products that insurance carriers have stopped selling. However, these books continue to have a service commitment to the insured. Over time and with modernization of technology these books have become cost ineffective for insurance carriers to maintain.
A recent survey conducted by a global research firm1 indicated that the United States contributes up to 25% of the annual global Life insurance revenues. This market is 3-4 times the size of the UK market, which has seen significant traction in closed book outsourcing and evolving servicing models such as BPO and SaaS. With an estimated 400 million policies in force the closed book market in the United States is estimated to be 40%.
So where does it go from here?
Over the next two years, insurers will face challenging times. With an aura of uncertainty in employment levels in the US, new product uptake and sales are expected be rather flat. Many of the actuarial assumptions that were made while these products were initiated would have changed post the 2008 meltdown. Insurers will be saddled with the task of improving revenues and premiums, as well as reducing costs and combined ratio's to help achieve financial results.
What strategies will insurers adopt to address this business challenge?
We can expect to see increased activity in books of business moving inorganically between insurers. A large section of multiline insurers will engage with specialist service providers to help improve financial efficiencies of closed books. Service providers usually draw expertise from multiple engagements across the value chain and are able to deploy effective solutions. Benefits that can be derived from this are:
- Simpler streamlined process for the end customer: Even though closed books remain closed to any new business there still exists a service commitment towards the insured. Archaic systems and processes often result in end customers being constrained and leaving with a negative experience. Service providers, through expertise deploy methodologies through LEAN to focus on customer expectations and build processes and systems centric to those.
- Shared service benefits / workforce rationalization: Service providers usually manage core processes. Over time and with engagements there is also a reduction in support roles which help bring down the overall cost of operations, without any service impacts. Estimates are that role and workforce rationalization can bring in benefits to the extent of 10%-12%.
- Simplification of IT portfolio: Significant M&A activities over the last two decades have resulted in insurance carriers developing a huge IT estate and inventory of systems. Investment in technology with the expectation of incremental sales also has led insurers to create more modern systems alongside the existing ones. The reality of this today is that insurers have a big IT portfolio that needs to be maintained to keep the business going, which has resulted in unpredictable cost escalations. Closed books are otherwise profitable books of business with higher premiums and higher persistency levels, because these are typically policies which were sold years ago.
- Scalability and Flexibility: Insurers globally see volumes of business and customer contact fluctuates. Some of this is predictably attributable to seasonality, while some of it is unpredictable and attributed to market and index movements.
- Global Sourcing Benefits: Insurers today have reached out to the global market for sourcing options. Global sourcing helps insurers tap and attract talent from the global market, to achieve specialization at attractive costs. The global delivery model also helps mitigate business continuity risks and can sometimes be the starting point for an insurer to expand footprint in the global market.
The potential for insurers to address some of the challenges associated with closed books is ever increasing. Service providers today have evolved and are reaching out with innovative engagement models, which can help insurers achieve objectives alongside balancing the risks and issues with outsourcing.
Insurance carriers that have been so far closely run will now need to evolve to the ever changing needs of a global consumer. With the advent of faster and quicker communication systems and information, profitability and products that deliver, will be the focus. Will insurers look to more closed books outsourcing?
1. Everest Research: Closed Books Insurance BPO