Closed Insurance Blocks Represent 40 Percent of Premiums

Life, annuity and pension firms are struggling to generate profits for shareholders, members and policyholders due to the global economic slowdown, increased competition and low interest rates. This confluence of factors is leading many insurers to reassess which products and markets are to be considered strategic, and how to best manage the discontinued, unprofitable and non-strategic portions of their business, according “Strategies and Options for Managing Closed Blocks: Life, Annuities, and Pensions Edition,” a new report from Celent.

Celent estimates that in terms of premiums, 40.4 percent of the total U.S. life insurance market (excluding critical illness and disability), and 39.6 percent of the UK life insurance market, (in terms of premiums for life, annuities and pensions) are derived from non-strategic or closed blocks.

“Ninety-two percent of insurers we spoke to highlighted that a change in strategic focus was one of the top three reasons for closing a block,” said Karen Monks, analyst with Celent’s North American Insurance Group and coauthor of the report. “Most insurers claim to have an active strategy in place to manage these blocks. However, the most popular strategy continues to be managing the run-off internally using current systems. The cost of continuing “as is” with this strategy may be too high for many as they look to reduce future liabilities and costs in line with reducing block size.”

Celent believes that many insurers will begin selling or transforming the business that supports closed blocks, but that there are a growing number of proven technologies available to manage closed blocks.

“With a growing market of mature and proven capabilities consisting of options to both variabilize costs and contain liabilities, insurers can no longer say that there is an absence of viable alternative strategies,” said Jamie Macgregor, senior analyst with Celent’s EMEA Insurance Group and coauthor of the report. “However, insurers still need to exercise care supported by effective due diligence, because the cost of getting the strategy wrong is high, with a far-reaching impact on the shareholder, policyholder, and regulator.” 

The report examines why insurers opt to close books and the challenges they face when doing so. It also examines exit strategies insurers may take as they turn these policies into “run-off” businesses and the different options available to insurers in U.S. and UK markets.

Highlights from the report:

U.S. insurers typically manage their closed blocks internally, often with a reinsurance arrangement. Others use outsourcing. However, the economy and the liabilities associated with some products are forcing insurers consider more radical options, such as the sale or transformational outsourcing of closed block business.

UK insurers typically sell off closed blocks to specialized consolidators or large-scale outsourcers. Of the nearly 40 percent the UK market identified as closed blocks, Celent estimates 17 percent has already been placed with a specialist business processing outsourcer; the remaining 23 percent is managed internally.

Emerging markets will face these same challenges over the next decade or two.

Some insurers view the closed block market as a growth opportunity and are developing propositions targeted at the closed block market. Among insurers not currently considering sale, some outlined timeframes of two to three years before making a final decision on whether to outsource or undertake an internal transformation.

Over the near term, the number of potential supplier solutions will outpace the number of deals. Celent believes insurers should take their time to explore a wider range of supplier solutions, potentially engaging the non-obvious but capable suppliers in the market prior to finalizing their strategy.

The cost of doing nothing too high for many insurers. Further, insurers can no longer excuse inaction by claiming an absence of viable strategies. However, insurers still need to exercise due diligence because the cost of getting the strategy wrong is also high, with a far-reaching impact on the shareholder, policyholder, and regulator.

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