Are emerging technologies providing cost-effective options to manage closed block policies?
In the L&A insurance segment, millions of policies that were sold in 1970s, ’80s, ’90s, or earlier remain in force. Millions more were sold in this millennium, but many insurance companies have discontinued selling these older policies. The policies that are still in force but are no longer sold new are called “closed block.” Insurers with closed block policies face ongoing challenges as they still need to administer the policies, manage costs, and meet policyholder obligations.
From a closed block standpoint, insurance companies look to optimize operations (i.e., keep costs down) to support policyholders until the policies terminate. Most of these policies reside in various legacy systems, which makes it harder for carriers to manage, continue to optimize costs, and provide support demanded by increasingly technology-savvy customers.
Let us look at some of the options for L&A insurance companies to consider. We will also discuss how emerging technologies have impacted these options and given rise to new ones.
One option is to outsource the closed block policies to a TPA (third party administrator). Another option is to engage a BPS (business process services) provider to administer the policies in insurers' current systems. With either option, typically the systems are based on monolithic legacy technology, which lends itself to a few challenges. These challenges include extensive time, cost, and effort to implement regulatory changes; substantial effort or inability to provide omnichannel support for technology-savvy customers; and most importantly, the inability to maintain legacy systems due to retiring baby boomers, which has resulted in talent erosion.
In the past few years, private equity firms and/or specialized firms have bought closed block policies with the objective of generating revenue and operating profit. Recent examples include Blackstone purchasing several blocks of Allstate policies and Resolution Life buying Voya policies. Many insurers have also created spinoffs to manage closed block policies. Some examples include The Hartford's spinoff of Talcott Resolution (which was subsequently sold to a group of investors); AIG's spinoff of Fortitude Re (which was also sold to other investors); and Venerable’s (a consortium formed by investors and Voya) purchase of Voya's closed block business.
The emergence of technology such as low code no code (LCNC) and the maturity of cloud computing and AI/ML capabilities have given rise to additional options for closed block administrators. Insurance, TPA, and BPS firms are beginning to take advantage of these new options.One of the new options is to move all the closed block policies into a cloud-based data repository (like a data lakehouse or a data lake), connect them to a LCNC platform to make necessary changes and provide self-service, and run AI/ML models as needed. AI/ML can help with wellness and risk prevention, as well as generate powerful analytics to up- and cross-sell. This option should drive down costs and improve operational efficiencies.
To undertake this transformative cloud-based option, you should start by extracting all your closed block data and rules (i.e., calculations), and cleanse and load them into a data repository in cloud. Cloud providers and third-party vendors offer many tools to begin this journey. After you have moved your data and rules into a cloud data repository, closed block administrators can build applications using a LCNC platform to make policy changes as well as provide self-service options for policyholders. AI/ML models can also be built to generate insights. In addition to self-service, agent and contact center channels can be enabled as part of an omnichannel experience.
L&A insurance companies now have many options to administer closed block policies. Among them, the newer, emerging technology option of creating and utilizing a data lakehouse or a data lake is very compelling. This option can provide faster turnaround time to implement new regulations, flexibility, scalability, cost optimization and operational efficiencies. Celent can provide the necessary guidance to select and execute this option.
For more information about closed block administration options, please reach out to Nanda Rajgopal (nrajgopal@celent.com) or post a reply to this blog. Here are additional research materials from Celent about closed block:
·Managing Life Insurance Closed Blocks: A 2016 Update
·2016 Closed Block Vendor Spectrum: Options for Outsourcing and Technology Transformation
·Closed Block Spectrum Report: Life, Annuities, and Pension Edition