Passage of the Pension Protection Act in August 2006 has made siloed IT designs obsolete. Life, annuity and long-term care combinations are now acceptable from a tax and regulatory compliance perspective. Recent pension legislation allows combinations of long-term care policies and annuities. As a result, we can expect a frenzy of product introductions in the near future and beyond.What does this new set of possible combination contracts mean to the IT systems of insurance organizations? It means co-existence and configurability are now of paramount importance. That gives rise to the bigger question: Are carriers' software solutions ready to support the new hybrid product world?
Before this legislation, regulatory constraints didn't allow life, annuities and long-term care to co-exist in common integrated product designs. In particular, annuity and long-term-care combinations were difficult to achieve.
Because of those constraints, software has continued to reflect the assumption that life, annuity and health products would never truly mix within a single product system. Insurance IT solutions have typically been designed to support a base insurance product and attach any add-ons as riders to that base product. These systems are not capable of handling hybrid products.
There are many siloed software solutions in the marketplace today built over many decades, operating under assumptions that only one product line can truly exist within a single market offering. But change is coming.
Brave New World
Our "brave new world" in the United States has been standard procedure for years in many parts of the globe, including Asia, the United Kingdom and Europe. In Germany, for example, many life product designs allow a life contract to morph into an annuity contract at specified ages or durations.
In other marketplaces that were never hampered by siloed thinking, software was designed to provide configurable solutions. The silo has been primarily a U.S. phenomenon. That is now changing to align with the rest of the financial services world.
With robust software a knowledgeable user can configure and align the rider opportunity set among the base plans set, independent of product limitations. The definition of premiums—whether contractual or noncontractual—is part of the overall market offering configuration.
If the premium for a given market hybrid product is contractual, the system must allocate that premium among the pieces and parts of the overall hybrid contract based on a defined rule set for the market offering.
If the premium is non-contractual, the system must allow for "funding" of the riders through defined amount calculations, coupled with the correct and configurable timing of dipping into "funds" available on the base plan. Allocation of the charges and fees among the funding elements must also be configurable as part of the hybrid market offering.
In addition, the software solution must define living benefits and death benefits at various points in time. That anticipates and allows multiple definitions to co-exist in the contract and to potentially change calculations through time, tied to events in the lifecycle of the owner, annuitant or other interested party.
All movement of money into the contract, within and exiting the contract-whether through administrative fees, risk charges or explicit contract owner distributions - must be tied to a taxable trigger set. That will invoke the required regulations and calculations when the event so dictates for a given product suite combination.
MIX AND MATCH
New combination products will appeal to consumers, and insurance companies will soon introduce innovative products to support the demand.
The new component-based, configurable IT systems bring flexibility that allows users to configure and align "pieces and parts" dynamically.
Users will define and select rules and calculations, unhampered by restrictive silo barriers and obsolete software that can inhibit creative thinking and slow deployment. The new systems do not contain hard-coded assumptions about product capabilities concerning payments, benefits, allocation features, tax triggers and calculations.
From a consumer viewpoint, people can now use a single contract chassis to plan for positive and negative possibilities in retirement.
When we envision product opportunities in this unbundled, mix-and-match manner, and the supporting system's architecture and capabilities share that vision, then rapid product introduction and administrative support deployment become possible.
Are you ready to take them on?
Stephen Kendrick is head of insurance business development at MajescoMastek Ltd., Edison, N.J.
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