Legacy policies: Significant processing and IT costs

Servicing legacy books requires significant processing costs and heavy IT support on everything from policy and eligibility reviews to client statements and payouts. The core IT running most insurance processes has grown organically and through acquisitions, leaving insurers to grapple with a tangle of fragmented and outdated applications. The resulting complexity can account for up to 75 percent of the operating and underlying IT costs associated with servicing policies. Best-practice improvements such as process automation, platform consolidation, and data standardization can be difficult and costly to implement across large-scale enterprises. Moreover, such initiatives lie outside an insurer’s core business (see sidebar, “Checklist: Getting started”).

In the cases we’ve seen, companies have achieved significant benefits by offloading this burden to a third party. With legacy book outsourcing, a provider manages the portfolio and all its support systems, including the IT assets, infrastructure, call centers, and support staff. While the insurer owns the customer relationship, the outsourcer assumes the day-to-day administration, such as taking customer calls and issuing statements and payouts. This arrangement enables providers to drive economies of scale in two ways. While an insurer may manage only one or two legacy book portfolios, providers can service several clients at once, spreading fixed costs over a larger volume of policies. Their experience in IT integration, process design, and work flow management means they can better target bottlenecks and inefficiencies. In addition, the greater visibility from streamlined systems helps managers track costs and performance measures more effectively. Together, these improvements typically reduce the total IT and operations cost per policy charged by the provider as much as 50 percent.

Under this arrangement, an insurer pays the outsourcer a fixed price per policy, turning an uncertain operational expense into a guaranteed cost. When talking to regulators, insurers can point to this fixed, lower-cost outsourcing fee to calculate their overall cost position more accurately, potentially reducing the capital reserves associated with legacy books.

In one case, executives at a life insurer asked its chosen outsourcing provider to manage its legacy portfolio. Their goal was to reduce business complexity, improve customer satisfaction, and trim costs. A joint vendor–insurer project team (composed of IT, operations, and business staff) implemented the effort in phases, first defining its scope and then identifying the systems, databases, and operational activities to transfer. The vendor’s mandate also was to improve service levels. It created a performance-management system to allocate resources to areas that had the greatest customer impact. As a result, the vendor reduced the number of customer complaints by 30 percent in four weeks, surpassing the initial target of 20 percent in six weeks. Next, it applied lean-management techniques to smooth process flows and improve transparency—for instance, by using simple imaging solutions to scan documents, thereby cutting down on paperwork and making information more accessible. With those milestones met, the vendor began simplifying the insurer’s IT architecture, trimming the number of platforms to seven (from ten) by merging systems and applications. In all, these actions cut servicing costs per policy by 40 percent.