Harvesting Value

from Closed Blocks

The Opportunity, Cost and Benefit Realizations
of the Life Insurance Industry’s Largest Untapped Asset
TABLE OF CONTENTS

Abstract ............................................................................................................ 1

Premise............................................................................................................ 2

Condition.......................................................................................................... 2

Carrier Challenges........................................................................................... 4

Alternatives........................................................................................................ 5

Outsourcing Options – A Life Insurance Comparison................................ 7

Using SaaS/ASP To Support Closed Blocks................................................... 8

Outsourcing Concerns.................................................................................... 9

The Optimal Solution - SaaS/ASP................................................................... 10

Andesa Services, Inc. Harvesting Value from Closed Blocks

 ABSTRACT

What should a Life and Annuity

company do with a closed block portfolio
of complicated, benefit-rich, high-
maintenance policies and contracts?
The simple answer: optimize.
Optimizing the value of closed blocks is a strategic imperative. Closed blocks are an
ideal target for companies looking to liberate financial and human resources. Moreover,
Closed blocks are
improving the margins on portfolios not actively sold has a positive impact on top and
an ideal target for bottom line performance.
companies looking to
As elevated unit costs are a function of high expenses and low volumes, a particular subset
liberate financial and of closed blocks stands apart, particularly ripe for address. These small, complicated closed
human resources. blocks often share the following characteristics:

Modest volumes of policies/contracts

Products designed to meet the needs of a niche target market
Harbor unique benefits and esoteric product features
Demand expensive, highly skilled business people and custom technology solutions

This white paper provides closed block insights and discusses optimization tactics to help the
Life and Annuity company maximize its return on closed blocks. It specifically defines the
best solution to manage the most vexing closed block portfolios – effectively and efficiently.

In short, the optimal solution for closed blocks maximizes margin, unlocks latent value,
and delivers capital to fuel strategic initiatives. The successful solution is rooted in
preservation of the policyholder-carrier relationship, while leveraging technological
efficiency offered by a modern solution.

Allowing the insurance company to maintain intimate customer contact and employ
the power of a low-cost technical platform is the ideal mix of insurance company and
outsourcing vendor capabilities. As such, the SaaS/ASP model is the most powerful solution
for closed blocks – especially the portfolio of complicated, benefit-rich, high-maintenance
policies and contracts.

Andesa Services, Inc. Harvesting Value from Closed Blocks 1

 PREMISE

Closed blocks are a fertile source of

untapped financial and human assets that
can provide Life and Annuity companies
the opportunity to reduce costs and free
up capital for strategic initiatives.

Condition

Many Life and Annuity companies have a number of closed blocks. A closed block is loosely
defined as a group of policies that are no longer actively sold and positioned for run out.
A closed block is loosely Improving margins on in-force blocks (especially on non-core portfolios not actively sold) has
defined as a group of a positive impact on top and bottom line performance.

policies that are no A number of drivers are responsible for the propagation of closed blocks. These include:
longer actively sold and Ceased sales due to performance, such as:
positioned for run out. • Poor pricing
• Lack of scale
• Capital constraints
• Lapse rates
• Mortality/morbidity

Changes in corporate strategy, like:

• Shedding or shuttering non-core assets
• Demutualization

Regulatory changes

Market shifts

Mergers and acquisitions, primarily:

• Redundant systems and functions
• Non-strategic portfolios

Technology and product evolutions:

• Development of IT innovations that make existing technology
obsolete and promise efficiency
• Product innovation requiring new and more robust system capabilities

Andesa Services, Inc. Harvesting Value from Closed Blocks 2

 LARGE VS. SMALL BLOCKS

Closed blocks come in all shapes and sizes. These include:

Closed blocks come Large blocks of traditional products (sometimes referred to as “ordinary business”)
in all shapes and sizes, Often these are relatively simple term, whole life or universal life product designs.
The volume of these blocks may range from hundreds of thousands of policies to millions
including large blocks
of policies. In addition, these blocks often carry massive reserves and account for
of traditional products significant recurring premiums.
and small blocks of
For those portfolios of larger scale, the insurer has viable operational and financial alternatives.
niche products.
The carrier may maintain the block in-house. For this to be viable, the block must
have sufficient scale to warrant ongoing investment.
The carrier may outsource the block. Most outsourced vendors willingly assume large
homogeneous blocks because they can leverage similar competencies across multiple
carriers and realize economies of scale.

Small blocks of niche (complex) products

With its inherent complexities and relatively modest scale, a small closed block poses a
challenge to the insurer: maximizing the block’s value in light of its unique characteristics.

For small closed blocks, the insurer has the following characteristics to consider:

Generally, these products are targeted to meet a specific market segment.

They tend to have complex designs with certain “bells and whistles” designed
to attract a particular customer.
The volume of these blocks may range from a few hundred policies up to 100,000.
Such compromised volume may be attributed to a limited target market, or that
the product design is/was not widely accepted by the intended audience,
Due to the nature of the products’ benefits and provisions, these blocks typically
require highly skilled resources to service them.
Small blocks often operate on purpose-built, highly customized systems that tend
to be non-core, non-strategic IT platforms.
The customer base may be affluent with high service expectations.
The portfolio may hold significant assets and/or hold potentially valuable
client relationships.
As these blocks increase in number, operational efficiency decreases and service
teams become fragmented.

Andesa Services, Inc. Harvesting Value from Closed Blocks 3

 Carrier Challenges

Due to regulatory changes, market shifts and product obsolescence, small closed
blocks are an ever-increasing portion of a Life and Annuity company’s portfolio.
There are two basic
As mentioned previously, carriers must contend with non-core, non-strategic blocks
challenges with which of business. This creates two basic challenges:
carriers must contend Focus: Diversion of a carrier’s focus from product development and
when dealing with strategic initiatives.
non-core, non-strategic Cost: The carrier battles a cost structure that continues to increase over time, even
though the block of business typically diminishes as time progresses. A number of
blocks of business: factors contribute to this, including:
focus and cost. • Maintenance of Service Standards
The carrier must continue routine spending to maintain service standards to
retain customers and safeguard its reputation.
• Proliferation of Manual Processes
Most system initiatives focus on expeditiously getting a product on the street
for new business (open portfolio). Many “Day 2” system enhancements for
closed blocks are delayed or canceled. Therefore, the business introduces
spreadsheets and manual processes to compensate and offset the Day 2 backlog.
• Antiquation of Systems
Systems used to maintain these blocks of business often become obsolete
and more costly to maintain as time progresses. In addition, the cost of
maintaining the systems are not directly proportional to the number of polices
on the system. It costs as much to maintain a system for 1,000 policies
as it does for 50,000 policies.
• Increasing Costs of Technical Resources
Since the risks of losing institutional knowledge on these systems is significant,
a carrier often pays more to retain these “technical experts” who are constantly
lured by the attraction of newer and “more interesting” technologies.

Andesa Services, Inc. Harvesting Value from Closed Blocks 4

 Alternatives

The following two alternatives are suggested: optimizing value or outsourcing the business.

Optimizing Value

Life and Annuity companies have various options to optimize the value of closed blocks.

It is widely accepted Reduce investment in the legacy system.

A reduction in legacy system spending will deliver expense savings, and these
that contracting for
savings can be redirected toward investment in new products and services.
outsourced IT and However, operational costs are adversely impacted, as workarounds and manual
processes are introduced to compensate for the lack of IT investment.
professional services is
Reduce headcount associated with the closed block.
a cost-effective option A reduction in headcount will provide expense savings, but staff reduction can result
for handling specified in deteriorating customer service and a stressed workforce. However, compensating
investments in technology can help offset full-time equivalent (FTE) reduction.
business functions and/
Perform business process reengineering (e.g., Lean Six Sigma).
or managing technical This approach can deliver operational improvements and yield savings.
commodities. However, real expense reductions come from optimizing processes through
automation. If a commensurate IT investment does not accompany the business
process reengineering (BPR) exercise, the gains are limited.
Sell the closed block.
Life and Annuity companies may not want to surrender the associated surplus and
part with any of their customer base. They may be loathe to losing scale, cross-selling
opportunities and the opportunity to convert the closed block to a better, more
profitable product (or cost-effective platform).
Consolidate systems internally.
System consolidation requires converting policies to a common platform.
The migration is often challenging (due to a lack of historical documentation, poor
data quality, resource contention, etc.) and very costly — with large project overruns
being the norm. Consequently, most insurers conclude that a positive business case
cannot be made for converting a non-strategic block in runoff mode.
Outsource the block of business.
It is widely accepted that contracting for outsourced IT and professional services is
a cost-effective option for handling specified business functions and/or managing
technical commodities like data center, hardware, software, and business application
support and maintenance.

Andesa Services, Inc. Harvesting Value from Closed Blocks 5

 Outsourcing Business

A carrier has a number of options available if it chooses to outsource a closed block

of business. Those options include:
A carrier has a number
of options available if Information Technology (IT) Outsourcing: Delegating some (or all) IT functions
to one or more external partner(s).
it chooses to outsource a While wholesale IT outsourcing (a.k.a. “Lift and Shift”, Application Management
closed block of business. Agreement, or ITO) to an offshore provider may reduce the IT wage cost
component, many companies find certain business processes cannot be easily moved
offshore. When sourced offshore, remote application management, language and
cultural issues sometimes prove problematic.
Business Process Outsourcing (BPO): Delegating some (or all) certain business
functions to one or more external partners.
Like IT outsourcing, selecting a BPO provider for commoditized business processing
can reduce the wage cost component. However, care must be taken when choosing
a BPO provider. Without the proper care and attention to detail, the carrier’s loss of
direct contact with its customer can lead to erosion in service, as well as a lost sense of
“feel” for the insurance company’s constituency.

Application Service Provider (ASP): Providing remote access to business

applications that are supported and hosted by the authoring third party. In this case,
applications are single tenancy.

OR

Software as a Service (SaaS): Providing access to web-native applications that are

hosted by an authoring third party. In this case, applications are multi-tenancy.

A qualified outsourced vendor can provide mission-critical applications in a secure, low-risk

business arrangement with favorable price points and terms.

Andesa Services, Inc. Harvesting Value from Closed Blocks 6

OUTSOURCING OPTIONS – A LIFE INSURANCE COMPARISON

SaaS ASP BPO ITO

What Insurance business Insurance business A third party Information

operations performed operations performed (on behalf of the technology (or pure
by insurance company by insurance company insurance company) technical functions)
personnel using personnel using executes insurance are supported or
business applications business applications business functions. managed by a third
offered by the third- offered by the third- party on behalf of the
party outsourcer. party outsourcer. insurance company.

Who Candidates include: Candidates include: Candidates include: Candidates include:

Sales force Illustrations run Finance / Any or all parts of a
automation by authorized accounting SDLC practice area:
distributors of the
Client relationship Human resource • Coding
insurance company
management management
• Testing
Policy holder
Web-based Investment
service transactions • Re-engineering
illustrations management
executed by • Maintenance
(run by authorized
insurance company Customer care /
distributors of • Application
staff call center support
the insurance development
company) Proprietary Underwriting
• Web site
illustration Back office
Web-based policy development
and policy operation
holder self-service
administration Remote monitoring
transactions • Data entry
applications and maintenance,
Web-based policy supported by • Premium product support, IT
inquiry and on-line the outsourcer services security, network
reporting monitoring and
• Document
management, etc.
management

How Underlying hardware Underlying hardware Either party may host Either party may host
and software and software underlying hardware underlying hardware
platform supported platform supported and software and software
by outsourcer in by outsourcer in There is no
Software ownership
secure data center secure data center ownership
may reside with
Proprietary third party Proprietary third party either party consideration
of software
software; software;
Professional services
right to use granted right to use granted
conducted by third
by third party by third party
party; may require
licensed personnel

Andesa Services, Inc. Harvesting Value from Closed Blocks 7

 USING SAAS/ASP TO SUPPORT CLOSED BLOCKS

Employing the SaaS/ASP model to support closed blocks requires a conversion to the
outsourcer’s business platform. The business case for migrating policy data from a legacy
A holistic view of system to a new platform historically has been problematic: The potential for exorbitant cost,
conversion — one that daunting scope, and projected timelines are often deemed untenable.
contemplates various As such, the perceived risks associated with conversions have induced insurance companies
hard and soft benefits to maintain the status quo and abandon strategic platform initiatives that involve data
— can often build a migration. Nevertheless, times have changed, and the benefits of closed block conversion
are too great to dismiss.
compelling and viable
business case. Moreover, a holistic view of conversion — one that contemplates various hard and soft
benefits — can often build a compelling and viable business case. Such a conversion may
include: risk mitigation for incumbent platform, reapplying highly skilled resources to
strategic business initiatives, strategic consolidation platform and adding new products to
the new technology platform.

A key aspect to the SaaS/ASP model is that the insurance company maintains complete
control of the business processing functions and preserves day-to-day interaction with
the client and producer. The benefits of this method have been shown through market
research performed by Celent (the leader in research and consulting for IT in the financial
services industry). Their study, summarized on the following page, included 10 areas of
outsourcing concern.

Andesa Services, Inc. Harvesting Value from Closed Blocks 8

 OUTSOURCING CONCERNS

As previously mentioned, Celent used 10 areas of concern to survey insurance companies

about outsourcing business. In their report, “Approaching the Boiling Point: BPO, SaaS in
Though BPO Insurance” (http://www.celent.com/reports/approaching-boiling-point-bpo-saas-insurance),
arrangements can Celent asked, “If your company were to outsource core policyholder and agent services,
be beneficial, a recent which of the following would be your top three areas of concern?”

Celent report indicates A summary of the Celent findings indicate that the most desirable outsourcing solution
that many insurance should have the following attributes:

carriers prefer to keep Maintaining (and guaranteeing) service levels, possibly through binding Service
Level Agreements
their customer service
Giving the insurance company control of critical functions (e.g., client facing
staff in direct contact processes like underwriting, call center and claims adjudication)
with their constituents Providing audited data security (SAS70, SSAE16), disaster recovery (redundant data
when outsourcing centers) and business continuity (periodic joint testing)

core services. Allowing the insurance company to tailor its outsourced services to meet the needs
of its customers; letting the outsourced vendor provide the IT commodity and
augment services on request
Allowing the insurance company to keep its customer service staff in direct contact
with their constituents
Partnering with an outsourcing firm with a strong marketplace reputation that also
works behind the scenes using the insurance company branding
Choosing an outsourcing firm with a proven delivery track record that is financially
fit and provides an array of clients that are available for reference
Embracing an outsourcing model that insulates the end-customer from the
outsourcer so the insurance company can manage the ongoing client contact
Structuring an outsourcing relationship that minimizes the displacement of insurance
company personnel, while it provides for powerful cost savings
Engaging with an outsourcer that provides services and solutions that meet or exceed
state and federal regulations

Andesa Services, Inc. Harvesting Value from Closed Blocks 9

 SaaS/ASP — The Optimal Solution FOR MANY

It is clear that the overall, best solution for closed blocks is one that maximizes margin,
unlocks latent value and delivers capital to fuel strategic initiatives. The success of such a
solution is often rooted in preserving the policyholder/carrier relationship while leveraging
technological efficiency. Many insurance companies prefer to maintain intimate customer
contact while employing the power of a low-cost, modern technical platform. Though BPO
arrangements can be beneficial, the SaaS/ASP model is often the most powerful solution
for tapping the unrealized value inherent to closed blocks.

Getting Started

To overcome the “do-nothing” inertia, and capitalize on the abundant benefits of closed
block conversion, insurance companies should look to an outsourcing partner with the
Insurance companies
following attributes:
should take care when
Portfolio rationalization experience
looking for a SaaS/ASP An assessment of business product portfolios establishes a business-centric
partner to help them modernization strategy and roadmap.

harness value from their Proven conversion methodology

The creation of a realistic project plan and execution with ruthless precision.
closed blocks.
Proprietary conversion tools
Complete control over the people and tools used to perform the conversion.
Modern technology
Reassurance that the business is not converting to something that is already outdated:
the solution must be “evergreen.”
Platform flexibility
The system must have the ability to adroitly handle a myriad of product nuances (due
to system architecture and a vast library of technical components), business functions,
as well as well-articulated processes. A flexible system will minimize conversion cost.
In addition, a flexible system could potentially become a consolidation platform for
many lines of business.
Support for individual and group products
The ability to span traditional business silos offering inherent leverage and economies
of scale across an enterprise that helps drop unit costs.
Proven case studies and client references
Multiple references for production support of scores of Life and Annuity
products minimizing risks and providing assurance that the outsourcing partner
will deliver as promised.

Andesa Services, Inc. Harvesting Value from Closed Blocks 10

Andesa services — the optimal partner

Andesa Services provides comprehensive, integrated policy administration, plan

administration and support solutions for life insurance and annuity carriers and producers.

Andesa began as a pioneer in the field of COLI/BOLI policy administration. Today, more
than 30 years later, we partner with seven of the top 13 life and annuity carriers and several
top brokers. We offer a suite of SaaS and ASP services, all backed by decades of proven,
practical expertise in the industry.

Andesa’s highly experienced team of U.S.-based professionals is made up of devoted client

advocates who help industry leaders save time, reduce risk and tap unrealized value.

For more information, please contact:

Ron Scheese – President and CEO

[email protected]
610-821-8980

or visit our web site at andesaservices.com.