Strategies and Options for Managing Closed Blocks

Life, Annuities, and Pensions Edition
by Karen Monks,  Jamie Macgregor, July 23, 2012
EMEA, North America

Abstract

Today's life, annuity, and pension firms are struggling with the continuation of a global economic downturn where the competition for business is fierce, investment returns are low, and the need to generate an operating profit to shareholders, members, and policyholders is still high.

The impact of the financial crisis, increased regulation, and the reality that many older products are running on legacy technology has impacted insurers’ financial performance and agility across mature developed markets. These factors are leading insurers to ask what they should do about the management of products that they no longer consider strategic.

Closed blocks are usually generated either due to the discontinuation of unprofitable products or as a result of a change in strategic focus. Sizing the market is complex, owing to differences in what defines a closed block and also the lack of public information communicated around closed products. Focusing primarily on the US and UK markets, Celent estimates that 40% of premiums written in these markets are derived from non-strategic or closed blocks, according to the report Strategies and Options for Managing Closed Blocks: Life, Annuities, and Pensions Edition.

“Ninety-two percent of insurers we spoke to highlighted that a change in strategic focus was one of the top three reasons for closing a block,” says Karen Monks, Analyst with Celent’s North American Insurance Group and coauthor of the report. “Most insurers claim to have an active strategy in place to manage these blocks. However, the most popular strategy continues to be managing the run-off internally using current systems. The cost of continuing “as is” with this strategy may be too high for many as they look to reduce future liabilities and costs in line with reducing block size.”

Celent believes that many insurers will begin considering alternative accelerated solutions involving either the sale or transformation of the business that supports the closed blocks.  Furthermore, there are a growing number of proven technology propositions that can be employed as part of a transformation without the need to sell or outsource the problem.

“With a growing market of mature and proven capabilities consisting of options to both variabilize costs and contain liabilities, insurers can no longer say that there is an absence of viable alternative strategies,” says Jamie Macgregor, Senior Analyst with Celent’s EMEA Insurance Group and coauthor of the report. “However, insurers still need to exercise care supported by effective due diligence, because the cost of getting the strategy wrong is high, with a far-reaching impact on the shareholder, policyholder, and regulator.”

This report looks at the reasons why insurers opt to close books and what challenges they face in doing so. It examines the exit strategies insurers may take with regard to the administration of these closed books of business as they turn into “run-off” businesses. The report also discusses the differences between and options available to insurers in both the North American and UK markets.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is part of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America (Boston)
Erica Ferguson
eferguson@celent.com
Tel.: +1 617 262 8225

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)208 870 7875

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81.3.3500.3023

Table of Contents

Executive Summary

1

Introduction

3

 

Definition

3

 

Report Methodology

4

 

Target Audience

5

Drivers

6

 

Characteristics of Life Insurance Products

6

 

Factors Influencing the Decision to Close a Block

7

 

Reasons for Closing Blocks

9

Market Overview

11

 

North America Closed Block Market

11

 

United Kingdom

13

 

Rest of Europe

16

Challenges

17

 

Internally Focused Challenges

17

 

Externally Focused Challenges

19

Strategies and Options

21

 

Current Outlook

21

 

Potential Strategies and Options

23

Final Thoughts

32

 

Advice to Insurers

32

 

Advice to Suppliers of Solutions

33

Leveraging Celent’s Expertise

35

 

Support for Financial Institutions

35

 

Support for Vendors

35

Related Celent Research

36

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