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What Do Closed Blocks and Shoes Have in Common?

 

harvesting closed blocks insurance

By EErnst Renner of [NEOS]rnst Renner, Managing Partner

I am taking a risk starting this article on closed block insurance by drawing an analogy to the accumulation of shoes from my family.  The core concept of this newsletter is that closed products are like old shoes; they have served a purpose but may still hold value to the insurer, thus requiring a product-specific approach in their final disposition.

My wife has retained shoes from the mid-90’s plus we have scattered pairs of kids shoes from when they were babies to last year’s water shoes. This legacy footwear resides deep in various closets in shoe racks, boxes, or are individually un-matched in various locations (including our Boston Terriers bed).  Some of these shoes can still be used, requiring maybe new soles or laces.  Others have sentimental value (I truthfully cannot say what that means in shoes, but to my wife, it means a lot) while others just seem to linger, forgotten.  Outsized, outdated or worn out, these shoes in total represent a legacy rich in history, however have little or no future value.

These legacy shoes also represent a degree of risk. I once opened a closet door and no less than three pairs of 15+ year old shoes landed on me. They consume resources, create clutter (think Tote bins, floor space, boxes and basement space all in different areas), and tie-up human resources (to shuffle boxes, analyze sole wear, ponder the re-use of the shoes and ultimately put them back).

Lastly, decisions of footwear is relegated to a single, ultimate SME; my wife.  She makes all calls on where they go and whether to fix or replace.  This takes a percentage away from her other duties and takes mind-share away from shoe shopping.  She is essentially our Chief Actuary when it comes to shoes; setting an evaluation, making sure they are compliant with familial need, and determining a final disposition for our legacy footwear.  It is therefore many times easier to simply leave them alone than to figure out what to do with them.

Closed block life and annuity portfolios are an insurance company’s old shoes.  Every life or annuity business is littered with product blocks that have been closed.  Like shoes, these blocks pile up and consume precious resources while providing very little value to the enterprise.   Blocks are acquired through M&A, new products are innovated and perhaps do not hit their sales targets, or simply the company has outgrown the product and there is no longer an active market or distribution channel for them.

Legacy closed product blocks range in purpose, size and composition, all of which factor into how a company chooses to deal with them. These blocks still need to be serviced and actuarial, accounting, and compliance activities must be continued. To keep costs low, insurers often do as little as possible to these “old shoes”.  The reasoning is often simple: the cost to do anything with the block is too prohibitive. However, the “do nothing” approach is expensive too with lingering costs and risk.  To learn more about the cost of doing nothing, read our whitepaper “Modernization Options for Closed Blocks of Business”.

Just as it is not realistic to treat all shoes the same, it is inefficient for insurers to look at all their legacy products the same. Rather than trying to convert all old products onto a modern new system, or sent to an outsourcer, or sold off, etc., each product must be evaluated on its own merits to determine the best future to maximize value while diminishing cost. Part of that cost benefit evaluation must include not only the systems and operational expenses, but also the opportunity costs insurers pay to maintain them.

From a financial perspective, renewal premiums are the only incoming stream and there is value in the assets associated to the blocks as long as they are not outweighed by liabilities. An insurer may hold on to a block if there are high service requirements or to maintain a market perception of steadiness.  But just like “soft costs”, these are also “soft benefits”.  The only “hard benefit” is the nominal cash flow resulting from renewal and asset investments. As long as system and operational costs are low, renewal revenue and investment interest can be a positive revenue stream for an insurer. This is rarely the case, however, and typically applies only to specific blocks operating in a system and not to all blocks in a system.

Going back to my wife’s shoes,  these old products take up human resources (actuaries who designed the block or the few people still maintaining the systems that allow the block to be administered), they contain risk in the underlying assets, are under regulatory mandates, and they take up system resources. Like the old shoe boxes piled on a top shelf waiting to fall on the unwary, the antiquated platforms closed blocks reside on are equally risky and vulnerable to high maintenance costs from vendors or specialists.

For a more thorough description of risks, costs and possible outcomes, please review our eBookHarvest Value from Closed Blocks of Business.

We have looked at the industry and developed paths for blocks to take if they do not fully realize their potential, that lowers the overall costs at the time the decision to close is made. The intention is that as the product matures and enters each stage of life, the insurer knows how to anticipate costs, reduce risks associated to tying up SME’s, and can even consider less-expensive alternatives to systems based on product sales and service requirements. We have worked with Milliman to help our clients think through outcomes and dispositions for product blocks as they are designed, creating a complete lifecycle plan.

Conclusion

Determining what to do with closed business requires a “surgical” approach as not a single solution works for every product.  After all, not every shoe fits (I couldn’t help it…).  Each closed block may require its own approach.  Selling, keeping, or outsourcing a closed block should be based on objective metrics that are aligned with the insurers bottom-line and strategy and not on theory.

At NEOS, we have developed a scoring method that takes into account a number of metrics that create an objective view of the block and its insureds.  These metrics and subsequent scoring measures help provide a framework for building an efficient management strategy for existing closed blocks.

Sometimes the call on “leave as is” for your block is warranted, but our advice would be to not let that be your strategy for all of your closed block business.  Sometimes putting a new sole on old shoes or chucking those grass-stained Keds in the bin is more appropriate.

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