January 20, 2011

The value in outsourcing legacy insurance products

Life insurance is a long-tail business: decades can elapse between the time when a policy is sold and the claim is made. Managing a portfolio of these policies, each with its own approximately 40-year time horizon, can present an operational and IT headache. As more and more policies expire, the overhead and servicing costs for the systems that manage legacy products are spread across a dwindling number of active accounts, driving per-policy administration costs higher. Since insurers are required to book capital reserves against future expenses, those costs and their anticipated increase over time can weigh heavily on the balance sheet.

The outsourcing of “legacy books” (or “closed books,” as they are also called) can provide a big lift to the industry, freeing insurers from managing the processes and IT that support these mature product lines. In addition, engaging providers that specialize in these areas typically yields substantial cost savings and can help insurers lower their capital requirements.

Despite the promise of outsourcing legacy products, the practice has yet to spread beyond the United Kingdom. There, regulatory requirements on the life insurance industry, enacted at the beginning of the decade, put severe pressure on margins and costs. While some insurers sold their legacy books outright, others turned to outsourcing. What began as an effort to relieve a growing administrative burden gained traction as insurers recognized that providers could drive down servicing costs through more efficient processes and better IT integration.

Outside the United Kingdom, however, insurers have remained skittish about handing over a large part of their operations to inexperienced vendors. Likewise, vendors have stayed on the sidelines, wary of investing in an unproven market. That chicken-and-egg dilemma may be about to crack as players in North America and continental Europe, prompted by rising administrative costs and persistently soft insurance markets, consider outsourcing their legacy book management.

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