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

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26 March 2012
Jamie Macgregor

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.

Comments

  • There are a couple of options we see being pushed these days as alternatives and both need specific circumstances to becone the best option but I thought I would make mention:

    First off, Reinsurance - there are a few reinsurance firms out there with various plans for taking over the block and risk with more options than you could imagine and it does have viability

    Secondly, the advent of technology means you may be able to utilize an option like Informatica ILP to archive off the data, shut down the PAS concerned and still be able to administer the block.

    Again, not the most mainstream approaches of options but I thought worth a mention as you look to study this area.

  • There could be possibly one more option with insurer to give the business to TPA( Third Party Administrator) to lesser the cost and provide perhaps the same quality to the customer.

    Just provided my thought.

  • Thanks Stacey for sharing - looks interesting especially the Reinsurer option. it would be great if you can throw some more light of it or refer to some source to read about it. Regards, Amit

  • Hi Amit - For a bit more information on the reinsurance option, see our strategies and options report that has just been published this week (http://www.celent.com/reports/strategies-and-options-managing-closed-blocks)