Life Insurance: Closed Book of Business –Challenge and OpportunitiesLife Insurance: Closed Book of Business –Challenge and Opportunities

www.niit-tech.com

Sairam Mandalika

NIIT Technologies White Paper

CONTENTS

Introduction 3

Problem Statement 3

Key Challenges of Closed Book 3

Traditional Approaches 3

The Solution 4

Benefits 5

Summary 5

References 5

About the Author 6

About NIIT 6

In the wake of increased competition and dynamic economic

environment, the insurance industry today faces the daunting

challenge of maintaining operational efficiency.

Closed books are policies that are no longer sold but are still on

the books of a life insurance carrier as premium-paying policies.

Closed books are caused by either discontinuin g unprofitable

products or as a result of acquisitions and mergers. The hardware

and application maintenance costs for the legacy systems that run

the closed books are high.

Insurance carriers are looking for cost savings, operationa l

efficiencies and ways to get closer to their customers . This

whitepape r evaluates various solutions for cost-effective

management of closed books for global life insurance carriers.

Introduction 1. Maintaining Legacy Systems

Closed funds are usually maintained on old Legacy Policy

Administration Systems which have very high maintenance costs

2. Operational Cost Management

As no new policies are sold, the portfolio size steadily decreases

over time. Steadily decreasing portfolio size demands parallel

reduction in policy administration costs to keep the business

profitable.

3. Regulatory Penalties

The workings of a closed book is likely to be scrutinized by

regulators and capital markets

4. Deteriorating Customer Service

Due to inter-play of factors like transition management and bad

publicity, customer service may suffer in a closed book.

5. Staff and Agent Attrition

As portfolio size decreases in closed books business , any

unexpected surrenders or terminations can prove disastrous.

Clients in closed books business may not have any

advisor/agent for on-going advice or service.

Most vendor product applications are derived from IBMs’62 CFO

product - for example Vantage-one, Cyberlife, LifeComm, LIDP,

Life/70, and Life400.Thes e application s are also derived from

homegrown products that are modeled on IBM’s products. They

are in third generation languages like COBOL/Assemble r on

Mainframe . Product companies also introduce their own

complexit y to ensure continued dependenc y of insurance

companies on their applications.

Problem Statement

In-house management of closed book operations presents many

obstacles for businesses looking for agility in an increasingly

competitive environment. These challenges touch most areas of the

business, making it harder to reduce operational costs, complicating

financial reporting, and obstructing new selling opportunities.

Key Challenges of Closed Book

Outsource Closed Book Administratio n to a Third PartyCompanies hire high-end resources for providing certain services

that cannot be met by the internal staff. They utilize these

resources on need basis and get the critical work accomplished

instead of spending time on upgrading the existing team’s

knowledge. This model works during introduction of new products

but in the closed block scenario, this is expensive as there is no

Traditional Approaches

3

This per contract cost is high in the long run. Though there is

minimal or no activity on many contracts, insurance companies

have to bear the support cost.

4

return on investment. In addition to costs, the existing team does

not gain any knowledge out of this engagement.

Dual Shore Support ModelMost insurance companies moved from outsourcing support to

high cost product companies to the dual shore support model. In

this model, the cost gets reduced as the offshore team provides

support. With this model, insurance companies continue to have

control on day-to-day operations. Though this model gives benefits

every year, it has its own set of challenges.

• Continued increasing operational costs

Infrastructure

- Hardware

- License costs

- Several tools

- Connectivity

Management

- Added layers of management (Internal/Vendor)

- Retention of high end resources (BAs/SMEs)

Utilizing Third Party Administrators (TPAs)In this approach, the entire support of the product is moved to a

TPA. TPA administer s the contracts on his infrastructu re and

provides feeds to the internal systems for reporting and

compliance. This eliminates the redundancy of dual management

layers and reduces infrastructure costs too.

The TPA approach creates more expenses in the customer contact

areas like BPO etc. as resources need to be trained on TPA

applications . To circumvent this, insurance companies try to

outsource even the BPO operations to TPA. This may not always

work, as many of the TPAs do not have customer contact

application support in their solutions.

In addition, there is also a one-time major cost of converting to a

TPA system. It comes with the risk of reconversion cost, if the

insurance company decides to break away from the TPA. TPAs

have home grown application s that are proprietar y, and

reconverting back to the insurance company’s products is a major

effort. Moreover, as TPA’s products are in-house, it becomes

mandatory to use only TPA’s resources for reconversion. Insurance

companies are forced to continue till the end of all contracts, as

they find it difficult to move out of TPA contracts.

Since all insurance products are based on IBMs’ 62 CFO, obtaining

license for any one of these products (NTL-INSURE) is one solution.

As these are closed blocks of business, any of the earlier versions of

the product will serve the purpose, thereby reducing licensing costs.

In addition, the changes required for administering the system’s

product features is minimal. This is because most of these products

that have been a part of the closed block of business and would

have been issued a long time ago. They have similar type of benefits

and riders across multiple insurers. Most of the older versions of the

vendor products have almost all features and little or no changes are

required for the product specific feature. Most of packages have

company based processing logic that can be leveraged for setting

up different businesses under the same insurance company and for

multiple insurance companies.

It is best to get NTL-INSURE application converted to Linux platform

which requires less operational cost.

Expertise in NTL-INSURE product administration must be built by

acquiring Subject Matter Experts (SMEs) and Business Analysts

(BAs). By utilizing their expertise and NIIT MATRIX methodology

learning plans and certifications specific to the application can be

built. It helps ramp up of resources easily.

A non-intrusive conversion approach has to be defined. In this

approach reusable components have to be built to perform

conversion from any source system. The design is such that a

common set of information is obtained from the source system,

irrespective of whether it is a vendor product or home grown

product. This is then converted into NTL-INSURE by reusable

conversion component. These tools ensure that the information in

the system is returned back to insurance companies for further

reconversion in case of contract terminations. It saves on

conversion costs and eliminates the dependency of insurance

company on NIIT Technologies for reconversion purposes.

The Solution

Obtain a Vendor ProductObtain a Vendor Product

Reduced Operational CostsWhen closed block of business is being administered by

NTL-INSURE, insurance Companies can easily implement changes

in their existing systems with less impact and cost.

An end-to-end cost based contract service rather than current per

contract charges must be provided. This ensures the elimination of

unnecessary costs incurred for contracts that have had no activity in

a given period.

5

Benefits

Minimal Conversion CostConversion cost is minimal for the insurance company when they

map to the business layout provided by NIIT Technologies. Very little

effort is needed from insurance company.

Smoother TransitionConversion to and from NTL-INSURE is relatively smoother as it

involves little or no external resources.

Faster Response TimeAs these contracts are administered on other platforms, the

response times are much faster than on legacy platforms. In

addition NIIT Technologies Smartserve’s best practices ensure

continuous improvements.

Reduced Maintenance CostAs insurance companies pay according to services rendered, rather

than per contract basis, there is a lot of cost reduction.

Improved Customer ServicesBeing CMMi Level-5 entities, NIIT Technologies and NIIT

Technologies Smartserve provide superior customer services.

24X7 ServicesHaving offshore infrastructure support and by providing dual-shore

or near shore operations, there can be extended hours of customer

support resulting in increased customer satisfaction.

Summary

Closed book of business is a major issue in insurance industry

where contracts are serviced for very long terms. These contracts

need support till the last contract in the book is active. Owing to the

complexity and multiplicity of vendor product systems, acquisitions,

and several touch points, administering becomes expensive.

The current model of getting high-end work done through

contractors, outsourced dual-shore support or employing a TPA for

support are not proving to be cost effective solutions. The

NTL-INSURE solution caters to this problem effectively. It ensures

that the insurance company gets the required support at a very little

cost. At the same time, the company will have the flexibility of

reconverting the contracts at minimal cost.

Sairam Mandalika is Delivery Head Insurance practice at NIIT Technologies. He has done

fellowship in Insurance, LOMA-Level-1, ITSM, PMP, and is a certified Actuary. Sairam has over

28 years of experience in the Insurance domain – Life, Annuity, P&C, Multiple Insurance vendor

policy administration products. He was instrumental in designing and implementing solutions for

all the Life Insurance operations.

About the Author

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