Modernizing your annuity platform to reduce costs, improve customer service and increase business agility

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SummaryFor today’s insurers, an annuity platform is the lifeblood of their business. At many annuity carriers, however, annuity systems are not effectively meeting their needs. One reason is that the insurance consumer environment has changed. Annuity purchasers have many more choices of insurers today than they did a couple of decades ago and they increasingly demand annuity flexibility; these changes present challenges for insurance companies, who now need to provide more flexible and competitive products. In addition, the underwriting and pricing of annuities is becoming more individualized. Legislative changes have necessitated that insurers make changes to the way annuities are administered. Given the need for better agility and flexibility in response to consumer, competitive and legislative change, insurers’ information systems environments are a special cause for concern. A kind of “hardening of the arteries” has set in for many firms when it comes to their

legacy software capabilities. Existing systems often reflect overly siloed processes, sometimes the result of mergers or acquisitions, which makes them inflexible and less responsive to business needs. Legacy platforms are also generally expensive to maintain and, because changes to existing products or the addition of new products require new coding, a company is often hindered in getting new offerings to market quickly. This constraining IT environment is especially concerning because of the huge growth in the annuities market as “baby boomers” begin to retire. Many older, in-house systems will not be able to scale to the needed level and administer high volumes of business efficiently and accurately. Much is at stake here and insurers are aware of how critical these administrative systems are to their success. So what are insurers to do faced with these challenges? How can they create a truly modern annuity system? One option is total replacement. Although that was a common choice a decade or so ago with large insurers, the current IT budget crunch generally prevents all

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but a few companies from pursuing that approach. Another path forward is “fronting”—leveraging a leading insurance software platform to provide a new, updated user interface layer to the legacy systems. A third approach is a hybrid of those two—replacing perhaps a couple of critical systems immediately while leveraging the fronting capabilities for the others while pursuing a phased approach over several years to migrate those systems to a modern platform. Insurers should be looking at software platforms that support any of these options. Whichever path is chosen, modernizing the annuity system can pay big dividends. It can enable insurers to increase speed to market, improve operational efficiency and drive down costs. Better products can be developed, customers served more effectively and compliance-related process changes can be made more efficiently.

Modernizing your annuity system can pay big dividends to insurers. It can enable them to increase speed to market, improve operational efficiency and drive down costs. It can also help them to develop better products, serve customers more effectively and prepare for an aging customer base. New platforms and approaches enable insurers to gain immediate usability benefits while taking an incremental approach to the eventual migration of existing systems.

Characteristics of a modern annuity platformA modern annuity platform needs to be able to support multiple product lines or capabilities, including variable annuities, fixed annuities and payouts (which can be part of variable and fixed annuities). In each of these cases, business and industry trends have made the products more complex, straining the functionality of many companies’ legacy systems. Variable annuities The variable market is dependent on the general variable stock market. Because there are no guarantees that the stock market will go up in any given year, insurers have tried to compensate by offering guaranteed living benefits. This has been a way to counter market risk. For the last 15 years variable annuity products have included these guaranteed living benefits as a rider to the annuity product. A modern annuity platform therefore needs to be able to support these riders, which can be extremely complex; dozens of values need to be calculated and many of them need to be included for display in policy quoting. An advanced software platform can give insurers the ability to adapt to this complexity more effectively because it enables business users to make configuration changes rapidly rather than waiting for IT to generate new code.

Fixed annuities Fixed annuities include two major categories of products. One is a general fixed product which often offers better interest rates than a money market or a savings account. Another product category is the equity indexed annuity that ties performance to a major stock index. For these products a modern annuity system needs to be able to perform the market value adjustments that enable insurers to pass interest rate risk on to customers rather than absorbing it themselves. Payouts For some years, as baby boomers have approached retirement, the expectation has been that payouts would grow substantially. But for a variety of reasons—among them economic

uncertainty and the fact that many people are working past traditional retirement age—people are not converting their deferred annuities into payout annuities at the expected rate. As a result of this trend, payout products are now more complex than they were 10 or 15 years ago. Older systems did little more than just pay checks. Today an annuity system must support the goal of making payouts more liquid and providing more flexibility because some customers have had 20 or 30 years of flexibility on the deferred side. Configuration and testing Another essential feature of a modern annuity system is that it should be significantly configurable

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from a product, business and process perspective. In recent years, configurability has been the principal driver of the reduced effort required to make product changes. More advanced software platforms for the life insurance industry go beyond configurability by offering prebuilt or “out of the box” templates for product and business configuration. These default products come with documentation and test cases for new carriers to leverage during initial implementation. They also come with simplified data structures, which can improve data access and simplify integration with other systems.

Overall, the templates and default products are another way to reduce work effort, cost and risk. For instance, after switching from a legacy environment to Accenture’s modern life insurance platform, one insurer cut new product roll-out time by approximately 65 percent, while tripling the number of new product launches. The software platform should also offer effective testing capabilities because, even with advanced configurability, testing is still an essential part of the overall process. The platform should offer a flexible and efficient testing environment that maximizes the ability of the product designer to analyze, modify, and confirm the behavior of new products and features. Accenture estimates that these testing tools can reduce product testing efforts by up to 50 percent.

Reaping the benefitsA modern annuity platform can deliver significant benefits to life insurers:

Reduced costs and improved efficiency: The configurability of a modern platform enables insurers to cut costs while also improving the overall efficiency of the business. Such a benefit looks slightly different depending on the size of the company. Using the platform’s templates, companies can make process changes easily, which reduces overall operational costs and implementation time. Configurability enables insurers to reengineer their operational environment to create more efficient processes.

Improved customer centricity: A modernized platform enables an insurer to overcome product silos with a customer-centric operating model. Insurers can interact with consumers through a variety of channels.

Faster speed to market: Platform modernization allows life insurers to modify existing products quickly and also launch new ones, which can reduce the time to market from months to weeks.

More accurate pricing: Modern systems help insurers gain a better understanding of risks by providing more sophisticated analytics of product values and customer trends.

Choosing your route to a modern annuity systemIf an insurer finds that wholesale replacement is not an option, two alternate routes are available to insurers to reach the goal of a modernized system. One is “fronting,” which involves putting a user interface “skin” over legacy systems; the other is a hybrid approach that may involve replacement of the most critical systems and fronting the others as part of a longer-term migration strategy.

FrontingAdvanced software platforms offer insurers the ability to create a better, more usable common front end to legacy systems.

A modern platform can offer a Web-based, configurable and readily deployable interface coupled with an efficient integration layer to address the changing needs of customers. By allowing the fronting of multiple legacy systems, the platform provides immediate usability benefits.

If an insurer finds that wholesale replacement is not an option, two alternate routes are available to insurers to reach the goal of a modernized system.

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One way that fronting improves usability is by tailoring process flows to specific users including consumers, agents, distribution partners and home-office users. The interface can also be designed for the newest devices and user experiences in the marketplace, including smart phones, tablets and Rich Internet Applications.

It should be noted that fronting is limited by the functionality of the underlying legacy system. That is, the modern interface creates a better user experience, which in turn can result in a better customer experience; however, in terms of processing capabilities, the front end can only do what the underlying system can do.

Hybrid fronting/partial replacementA second route is to choose the most critical systems needing replacement, migrating those to a modern platform but then using the fronting capabilities of the platform for the remaining legacy systems.

The business case for taking this route can be strong. Consider a company with 10 million policies. Eight million of those are older blocks and they’re not selling any new products. The firm just wants to be able to manage those, but it would be difficult to make a case for moving those 8 million policies to a new system in the short term because of the expense. However, the other 2 million are all products they are selling now—so they can make the business case for replacing those with a modern system for product integration, administration and new business.

In such a scenario, the annuity provider finds that they have a great system for their newer business but the same people who administer those products are using the legacy system. With a hybrid fronting approach, users on the legacy systems can have an experience much like they do with the brand new systems while the company executes a longer-term plan for conversion through gradual replacement.

Conclusion

As the annuities market grows and increases in complexity, many insurers are finding that their existing annuity systems are not able to cope with the variety of competitive, marketplace and regulatory challenges. Although they recognize the need to modernize, insurers generally are reluctant to make a wholesale switch to new systems due to the costs and business risks incurred.

As a result, rather than completely replacing a legacy system with a new system and incurring the process upheaval as well as the potential

business continuity risk, many insurers choose instead to modify their existing systems. The idea is to strike a balance between the old and the new while ensuring total business continuity in the process.

A modern annuity system can help insurers control costs through codeless configuration and through templates that enable process changes to be made faster. Pricing can be done more effectively through better analysis of risks. Perhaps most important, insurers can speed new products to market and help make changes to existing products faster.

As the technology and industry change continues at a blistering pace, a modernized annuity platform can give insurers a competitive edge.

A modern annuity system can help insurers control costs through codeless configuration and through templates that enable process changes to be made faster.

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An example of a large insurer that has used a modern insurance platform to realize important business benefits comes from a North American life insurance firm that offers both fixed and variable annuities.

The firm had been operating with a mix of older legacy systems and dated technologies, many of which were based on manual and often redundant processes. This resulted in operational inefficiencies, high unit costs, slow time to market and limited scalability—all of which eroded profitability and inhibited growth.

North American Life Insurer implements Accenture Life Insurance Platform to improve operational efficiencies

The insurer implemented a new policy administration system across product lines, supporting its new business and policy administration processes for the fixed and variable annuity business.

The modernized platform has given the insurer:

• More robust business rules management and engine functionalities

• Expanded self-service capabilities

• More flexible workflows

• Automated end-to-end business processes

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About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 281,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, 2013. Its home page is www.accenture.com.

Accenture Software combines deeptechnology acumen with industryknowledge to develop differentiatedsoftware products. It offers innovative software-based solutions to enable organizations to meet their business goals and achieve high performance. Its home page is www.accenture.com/software. For Life Insurance software, the home page iswww.accenture.com/lifesoftware.

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