I'm very pleased to welcome Nik Godon, Mary Bahna-Nolan, Sam Keller, Nathan Hardiman. Thanks to all of you for being here. I'd like to start by just asking you to briefly introduce yourself, give maybe the 30 second version of your background. Nik, if you want to go first.
NIK GODON: Sure. Nik Godon. I'm a senior director. I've been with WTW for almost three years now. Prior to that, I was with a large insurance company for over 22 years, with the last four being chief actuary. And I focus a lot of my time on UL litigation support, but also life block analysis, embedded value and all things life insurance.
MARK MENNEMEYER: Great. Thanks for that. Nathan, can you go next?
NATHAN HARDIMAN: Sure. Nathan Hardiman. I'm a director at WTW. I've been with the firm for about five years now. Prior to joining, I worked for direct writing companies for a little over 20 years. And my background is in a lot of different modeling applications, but particularly asset liability management, but
also cash flow testing, reinsurance and M&A deals. And since joining WTW, I've done a good bit of litigation work as well.
MARK MENNEMEYER: Thank you. Mary.
MARY BAHNA-NOLAN: Hi, I'm Mary Bahna-Nolan. I am a senior director with WTW. I've been with WTW about three months. So I'm a newbie here, but not a newbie to in-force management and our topic at hand. I've spent a lot of time or a lot of my career, I should say, both for direct writing companies, reinsurers, as well as with a big four audit firm.
So I have a pretty broad background and have spent some focused time with product and in-force management, both from the direct side as well as from a reinsurer side and from litigation support. I've been a chief actuary several times over, chief risk officer and a chief product officer, so I've sort of seen it from all sides. So excited to be here.
MARK MENNEMEYER: Great. Thank you. And Sam.
SAM KELLER: Thanks, Mark. I'm Sam Keller. I'm a director based out of our Minneapolis office. I've been with WTW for about 10 years, and I am a financial reporting actuary by background. So I lead our U.S. GAAP initiative, as well as I lead our business process excellence proposition, which is all things automation transformation and realizing those efficiencies.
MARK MENNEMEYER: Well, I appreciate that all four of you are taking the time to talk about this today. Clearly a very qualified panel for the discussion. So let's get right into it. I want to start by setting the scene and really just defining what is in-force management. Why are insurers focusing on it now? Nathan, can I put that question to you?
NATHAN HARDIMAN: Sure. Unlike some things in our industry, this is actually a pretty good descriptive name. Many companies have built up large blocks of policies that are in force over the past decades. And so you have this in-force business. And of course, companies are trying to manage those blocks efficiently and profitably.
And so hence the name in-force management has become kind of a focused word and area of practice in the industry. We haven't managed to decide whether in-force has a hyphen in it or not, but we're working through that as an industry still.
Companies have always thought about managing their in-force business. But I think a number of factors such as low interest rates, expense pressures, growing competition in the industry and stakeholder expectations over the past number of years have perhaps increased company focus on in-force management and led to groups within companies tasked with focusing specifically on the management of the in-force block.
MARK MENNEMEYER: Yeah. Thanks, Nathan. Great comments. I think we usually like to get feedback from our listeners, so maybe we'll extend that to ask if they have opinions on the punctuation too, to your
point there. But no, that's great. Appreciate that overview. So there are a variety of techniques insurers can use to improve the performance of the block along the lines that Nathan, you just described.
And each of the four of you has agreed to cover a specific one. So, Nik, I'd like to start with you and then we'll just go around the room here. Could you give an overview of one of the techniques that's available.
NIK GODON: Sure. So at least something that we've seen more recently is for large blocks where companies are, I'll say, no longer focused on the products in question and they're underperforming, their existing blocks are underperforming, we have seen a lot of divestiture activity.
And so what I mean by divestiture is either selling a company, but more commonly what we see is a reinsurance transaction. So there are lots of parties out there who are interested in taking on what may be distressed blocks.
And commonly, these would be variable annuity, fixed annuities and universal life insurance. And essentially, you're interested in acquiring them and managing them, I'll say, in a different fashion than what the direct writer may have done.
So we have seen over the last course of the last four or five years, an increase in this type of activity where large direct writers have been reinsuring, in particular, coinsuring these blocks of business to, I'll say, other interested parties, many of them private equity backed, who think they can better manage the investments to support these liabilities.
MARK MENNEMEYER: Thanks for that. So reinsurance is a great one. Nathan, do you have another one to add?
NATHAN HARDIMAN: Sure. I'll go back and talk a little bit about asset liability management. And much of that boils down to how well a company's assets are matched to their liabilities both from a cash flow perspective, but also from an interest rate sensitivity perspective. And you can get into some real problems if they're not well matched.
So there are a number of metrics that can be used to determine how well assets and liabilities match. You hear a lot about duration, and convexity, and cash flow profile are pretty common, and there are lots of variations of those.
But once companies decide how they want to measure and once they have the measurement structure and reporting process in place, then companies can use their financial projection models to test and to evaluate potential changes in asset or liability strategies or both ideally.
And you can use those models to evaluate the asset liability match, but also you want to be sure to pay attention to the impacts on profitability and capital position and other key financial metrics. And once you've done that, then ALM strategic decisions can be made to optimize the in-force block.
So once you have this whole asset liability management process in place, the cycle will repeat. You're never done with ALM, but rather it's an ongoing evaluation and decision making process as the economic environment changes, as the experience emerges for policyholder behavior and things like that. So it's an ongoing cycle.
MARK MENNEMEYER: Great. Thanks, Nathan. Sam, you hinted at automation in your intro. Do you want to expand on that in the context of in-force management?
SAM KELLER: Yeah. So obviously, automation and transformation generally can be a lot more broad than just focusing on your in-force portfolio management. But one of the things we do see is particularly with closed blocks, a move toward pulling the human element out of the day-to-day jobs there. And what that allows you to do is two things.
The first is you can recognize some efficiencies in terms of the cost structure. So keep the cost management on servicing those in-force portfolios to a manageable targeted level. But then the other thing that you're able to do, which dovetails into what Nick and Nathan have spoken about is-- the people that you free up from those tasks that you're able to automate are able to then do other things and explore other avenues.
So freeing them up allows the opportunity to really march down several of these other paths. So we see this automation idea as something that companies are using as a foundation to leaping off and doing other activities.
MARK MENNEMEYER: Great. Thanks for that. So we've got three solid ones already. Mary, do you have one to add?
MARY BAHNA-NOLAN: Yeah. I think mine is really combining all of these things. So some of the things that we really see is-- and Sam alluded to it with his broader sort of transformation and with that is rethinking the entire process.
So thinking about what type of activities really make sense to be done within an actuarial group versus another type of group that even includes thinking about what things could maybe be outsourced so that we can start focusing on the stuff that we really need to do, which is really helping to drive different insights.
A lot of times in-force management is not done well because folks just don't have the time. So by rethinking the processes as a whole, which includes bringing in automation, rethinking your ALM process, should we reinsure, should we not? So it's really bringing all of those things together and not piecemeal one at a time.
MARK MENNEMEYER: Thanks for all of that. So we've got a great list here: reinsurance, asset liability management, automation and transformation, just to recap. And to clarify, I think we all agree this is not a complete list of everything an insurer can do for in-force management.
So hopefully in the future, we can go deeper into other topics like capital efficiency, for example. But even with just the ones we're talking about today, you can cover a lot of ground and really make very good progress. So I want to zoom in for a second on outsourcing and automation.
And I'll make a claim and Sam and Mary especially, I'm interested to know if you agree with me. So my perception is that some people hear this and they immediately think, oh, outsourcing, automation, that's going to translate to expense savings.
And my view is that when done correctly, that probably will lead to expense savings, but it's not necessarily the only outcome or even the main outcome of why companies would pursue that. So I want to get your thoughts on that and see if you agree or disagree.
MARY BAHNA-NOLAN: Yeah. I guess I'll jump in. I completely agree with that. Transformation expense savings usually will come. But sometimes with transformation, there is more spend before there is actually savings.
And what transformation and where I've seen some companies really trying to go is let's automate our data flows and let's automate system-to-system communication so that we can get almost like a proxy model and real time insights into how our claims, or policyholder behavior, or the economic environment, how are they impacting our book as a whole? How do we think about has it made any changes to how we think about our ALM or our capital and liquidity needs?
And so really starting to bring all of that together. And I'll call it near real-time. I don't think anyone's really at true real-time yet, but bringing all those things together so that we can start really driving actionable insights and spending less time building the analytics and more time actually understanding what are the metrics and analytics really mean and do we need to take any action.
And that's where I see the power. And sometimes to get to that point, there is some spend in technology or in data structuring and organization, but in the end, it leads to maybe not a huge savings, but probably very actionable, more real-time decisions that then can be used to help make the overall business more profitable.
SAM KELLER: And I would agree with everything, Mark, you teed up and Mary, everything you said beyond that as well. And just to double back on something you said, Mark, obviously a component of automation is going to be to reduce costs, but that's not even necessarily what people that are embarking on that journey think initially.
So a couple of years ago, WTW did a global future of work survey and asked specifically that question, what are the desired outcomes from your transformation programs, your automation programs? And the number two answer was reduced costs. But the overwhelming majority, you know, at a response rate of three times the reduced cost answers was to augment human performance and productivity.
So what we really see, and I mentioned this at the initial commentary, was that being able to automate these rote, keeping the lights on type of tasks allows your people to go out and do things like the more sophisticated ALM or the reinsurance programs, develop those techniques, implement those techniques, and then you can automate those as well going forward.
So it really allows you to do a lot more than just what you were able to before because of all the people that were involved in really just keeping the buttons pushed and the cranks turned.
NATHAN HARDIMAN: This is Nathan. I'll jump in and follow up. I think that's a really important point, is you read a lot about challenges, especially through COVID and post COVID, about having employees engaged. And I think we've seen where companies have implemented automation and outsourcing. And employees are able to spend their time on these more value-added strategic tasks. There's proof culture and engagement that benefits the company as a whole as well.
MARK MENNEMEYER: Great. Thanks for those comments. So clearly there's a lot of opportunity to take advantage of these techniques, but of course, I think we all know that nothing comes without risk or without challenges.
And I'd like to focus on that a little bit more and ask each of you to comment on some of the risks, some of the challenges that insurers should watch out for when they're implementing these techniques and how they can deal with that. Nik, if I could start with you, anything that you could add related to the reinsurance and divestiture topic that you were introducing?
NIK GODON: Sure. So definitely risks there. Certainly as the direct writer, counterparty risk is something that needs to be taken into account, right? If you're going to do one of these large multiple hundreds of millions or billion dollar deals, you need to do it with the right party.
You're wanting to divest yourself of the business. But in a reinsurance deal, the direct company is still responsible for the business and responsible to the policyholder, so you want to make sure that your partner is going to be there now and in the future to help you meet those obligations you have to your policyholders.
So you certainly need to make sure to do your due diligence on that potential partner that you are going to do one of these transactions with, in particular, when you get into these very large and sizable in-force deals.
MARK MENNEMEYER: Yeah, absolutely. That's a great point. Nathan, what about some risks and challenges for ALM?
NATHAN HARDIMAN: Yeah. Just like in all aspects of business and probably life as a whole, there is no free lunch. So you do need to be careful and be sure you're thinking about things that can happen and unintended consequences and that kind of thing. So insurers need to be very cautious and careful when considering a wide range of asset and liability management options.
So you want to be sure to do very thorough sensitivity analysis and make sure you understand how the risk reward profile of the company is being impacted by potential changes in asset strategy or pulling different levers within the liabilities that you have and making sure that fits in to management's outlook and strategy and that everybody's comfortable with what might come along with making these decisions.
MARK MENNEMEYER: And Sam, what about you? I assume for you, there's probably no risk. You just automate everything and what could possibly go wrong. Is that right?
SAM KELLER: You'd like to think so. Mary, I think, teed this up really, really well when she talked about how there's a very distinct payoff down the line with these automation transformation initiatives, but there's an upfront cost to that as well.
And one of the things that we've seen a lot of companies fall into the trap of is you get started on something like this and then things fall off and you don't realize the success that you'd hoped at the beginning and you've sunk a lot of money into it potentially.
So one of the things that you've got to watch out for is how do you manage a project like that and how do you get to the point where you're structuring incremental wins so that even if your priorities change, you need to move away from it, you get some tangible benefits from what you've done so far.
And we've seen companies able to succeed with that by being really conscious of that fact, that you want to keep momentum, you want to deliver incremental wins and you want to keep the project moving
forward and in the event that things do have to go in another direction, that what you've done so far hasn't been throwaway work.
MARK MENNEMEYER: And Mary, anything that you want to add to that?
MARY BAHNA-NOLAN: Yeah. Maybe just a couple things that I commonly hear and especially around things like automation and some of the transformation or outsourcing is, well, this is how we train our junior actuaries, right? This is how we train our students and so what else do we need to do?
And that is something that we really do need to think through as we start to automate, is really changing how we think about our work, and how we think about our role, and how we think about how do we train our students coming up. And that is something that we do need to think through a little bit more.
But I'd say it's a good problem for us to think through and we need to start changing our ways of working as we think about transformation, as we think about automation and how do we move from cranking the numbers to really being the storytellers and having that seat at the table to really help to say, here's what's happening, here's why and here's what we should do about it.
And I think that then may be one of the biggest challenges for many that I have seen that have tried to embark on this is just that once you get there, everyone loves it. But there's that period where you really need to think through, we need to do things differently.
And so I really challenge everyone to think a little bit bigger and think about how do we rethink what we do and the value that we add and really helping to drive the decisions that we make around the books of business that we have.
MARK MENNEMEYER: Those are great points. And I think that leads very naturally into the final question I wanted to ask, which is really just what should insurers do next and how should they get started? If they're sitting there and they're trying to improve the performance of their in-force block, what should they do? It's an open question, Whoever wants to dive in first. It'd be great to hear some next steps that you can advise.
NIK GODON: I'll jump in first here. I think you really need to start with measurement, right? You need to identify-- we're talking about underperforming blocks here and in-force management, you basically need to identify what is the source of what's causing this underperformance. And your preference is certainly to identify that early on.
We've historically seen that a lot of blocks that are underperforming is because companies, I'll say in certain cases weren't willing to admit that things were going in the wrong direction and let those problems continue to build.
So we think you need to have reporting frameworks in place to allow that identification and to understand, here's how these blocks even at a granular level are performing and what is driving this potential underperformance.
So we often suggest people-- you already have your statutory reporting framework, you have your IFRS or GAAP. Those don't always necessarily provide you with the best information to understand how our products and blocks performing relative to my original expectations.
So we do think embedded value and value of new business provide a lot of additional useful information on top of your normal financial reporting that we think more readily allows you to hopefully identify these problems and pinpoint them and then basically as a team, figure out what may be the best course of action to possibly right the ship or then to lead to the right analysis needed to get to the best decision to hopefully change that performance and/or address the problem.
And in particular, VNB, the best way to not have an enforce problem is not to create it with your new business. So measuring your value of new business and understanding if you're having issues like immediately and can you then quickly course correct on that new sales you're having is a key way to address and hopefully avoid having some of the problems we've seen in the past.
MARK MENNEMEYER: Yeah. Very, very good point, especially that what you price for is not necessarily what you're actually selling and what you're realizing. So that's great advice.
MARY BAHNA-NOLAN: Yeah. Always a big fan of always saying premiums do not equate to profit. And I think that's something that probably will never change. Yeah. Building, I think, what Nik said, I agree with the measurement is key. Measuring at the right level of granularity is key, but also understanding in-force management involves a lot of people. We don't have to do it alone.
You always hear the saying, it takes a village. I think it's really important as we start thinking about how can we better manage our books of business to really break down those silos and have that open communication and dialogue across the organization, being partners with the organization.
And that includes your customer service folks, right? What are the things that they're hearing? What are they seeing? How do we start thinking about what we need to do to better manage this book of business overall?
How do we manage and make sure that our customers and the policyholders understand their book of business? That's a different side of in-force management, but it all comes back to profitability and making sure that everyone's in it together, everyone understands what you’re trying to achieve by it, and really having those communications. Because what's interesting is you find that there's a lot of different people that touch and impact the profitability of the business. And it isn't until you start bringing all that together that you really have a good handle on what the right approach is and really what are you thinking about and what's the best course of action.
SAM KELLER: I would echo what Nik and Mary have said and just add the need to be thinking about how do you align your technology-- so your automation programs, the tools around it-- to facilitate the granularity of analysis that you need, to Nik's point. And then to Mary's point, how do you make sure that the right people are in those processes at the right places? So I just emphatically echo what they said.
NIK GODON: And I'll just quickly add to what Sam just said. We talked about granularity. Timeliness of information is key as well. You can't be waiting a year to do an embedded value, as an example. Or you can't be waiting a year to do value in a business. You should be doing it rapidly after each quarter to, once again, quickly identify if you do have some challenges that you need to address. And automation obviously becomes a key part of trying to get that timeliness.
NATHAN HARDIMAN: I would echo-- just like everybody else's echoes-- on starting with the measurement. But I think another thing that we see a lot is that companies have very valuable tools that a lot of time and energy has been invested in, like your valuation models or your cash-flow-testing models-- that you can then invest a little more time or be a little more creative and think about ways that those can be used to help with ALM or some of the other types of analyses that you might want to do to consider different in-force management strategies so you're not having to recreate the wheel but leveraging existing tools and existing investments.
MARK MENNEMEYER: Thanks for those comments. And I'll add something too, that, of course, it might be the case that a company doesn't specifically know which one or two or three of the techniques we talked about today is really the best fit for them. I think I can safely speak for everybody here in saying that that problem is very solvable, and it's a relatively painless exercise to do an initial type of baseline assessment and help map out what a strategy would look like. That is something that we've done with our clients and could definitely be extended to any number of unique situations.
Ok. Well, we've covered a lot of ground. Mary, Sam, Nathan, Nik, it was great to hear your perspectives today. Thanks to everybody who is listening. And we'll catch you on the next episode of (Re)thinking Insurance.
NARRATOR: Thank you for joining us for this WTW podcast featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the Insights section of wtwco.com.
This podcast is for general discussion and/or information only. It is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice from a suitably-qualified professional.
