If you are part of management for a North American life insurer, chances are that changing market, regulatory and economic conditions have left you with blocks of business that either are “distressed” or have become non-core. The almost inevitable result is those in-force blocks are a drag on earnings; return on capital; and, in many cases, internal resources.
Advancements in data and analytics have enhanced the ability to understand drivers for such blocks of business. Additionally, healthy interest from in-force business acquirers provides a good option for counteracting a potential downward spiral in those blocks of business, releasing significant financial benefits for your organization.
From our experience across the market, we have identified four key factors that should help you to take advantage of opportunities to optimize your in-force portfolio.
01
Effective in-force management isn’t only a case of turning some “technical dials” differently. Effective management often requires some cultural change within the business.
This cultural change begins with clearly defined responsibility and accountability for the in-force book, including identifying what may need to be included in the enhancement program. Sounds straightforward enough, right? But often we see that ownership of in-force management is fuzzy. So, the organization should make clear who has responsibility and accountability for optimizing in-force business in line with organizational strategy and objectives.
Needless to say, assigning and sustaining such responsibility needs to come with buy-in and prioritization from senior business leaders. A key step in this process is setting up the appropriate lines of communication to make things happen. For example, an essential point will be ensuring that the actuarial and financial reporting tools and resources needed to facilitate optimal decisions are available.
02
There is no standard formula for in-force management. Each company’s products and circumstances will be different and will require different approaches to optimize capital and financial benefits.
But we have found that a common three-stage approach can help in identifying essential steps for achieving the objectives, mapping strategies for moving forward and developing a framework for actually taking action.
Secure alignment
The first stage is when you clarify how you are going to define the value of in-force optimization (to decide what is either in or out of scope), explore the wider organizational cultural factors that may need to be taken into account (such as potential impact on new business activity) and agree on key metrics. You should also consider likely regulatory attitudes toward various actions. Ideally, you should only need to do this once.
Deliverables from this stage would include:
Deep dives and business cases
As part of assessing the key value enhancement opportunities, you will need to conduct documented sensitivity testing and scenario analysis. From the results of this analysis, you can develop draft business cases and implementation plans to present to key stakeholders.
Planning and implementation
Once you have agreed on priority business cases and secured key stakeholder approval, you’ll need to finalize your implementation plans, including feedback cycles and performance monitoring. These plans are likely to involve detailed project plans, identification of control groups and pilot testing where appropriate, and monitoring of the impact of actions on key metrics.
03
Of course, measurement is a key step of in-force management and optimization. The first measure to understand is the original profitability/earnings expected from product pricing.
From that starting point, you will then need appropriate measures of current performance to identify if you have a problem/opportunity. These measures will also be used to make decisions regarding the optimal potential actions. You will want to produce these financial measurements regularly to facilitate the review of ongoing performance and the impact of any actions that have been taken.
All of these raise an important issue of practicality. What do you already have and what can be readily produced in a timely fashion? And most important, what do you really need to achieve your optimization objectives?
The reality is that most companies will have essential gaps to fill. Historically, many companies have been missing data and analytics at a sufficiently granular level. Many have also lacked the ability to compare pricing to the original pricing assumptions on an ongoing basis.[1]
Another core data and analytics issue that often needs addressing is that the leading indicators employed to date have been generally backward looking. And because the past may not be a good indication of the future, this has resulted in these indicators potentially becoming “bleading” indicators, leading to lags in action. Forward-looking measures are important, particularly as regulations and guidelines such as Actuarial Standard of Practice (ASOP) 2 and New York State Department of Financial Services Regulation 210 (for carriers with New York business) state that actions taken related to non-guaranteed elements be based on a forward-looking view.
A robust package of in-force optimization measures will include an understanding of the impact on all reporting bases. It’s also important to understand how reinsurance may affect future profitability.
04
Figure 1. Levers for enhancement of in-force life business
Now, let’s explore what the six levers for enhancing in-force life business cover:
Let’s dig into some specific action areas in which there are likely to be opportunities for insurers to take action.
Asset and liability management (ALM). It is not unusual to see that walls have developed between the liability and asset management sides of insurance companies. Improved collaboration typically provides an immediate opportunity to add value. Recent increases in interest rates may present new opportunities (including potential hedges against a return to lower rates) as well as additional challenges. Moreover, improved ALM may also present the opportunity to optimize capital given model-based calculations.
Captives. While onshore captives are now less commonly used, there still may be opportunities to add value, including improving financing costs. Offshore affiliates may also present opportunities to manage your total balance sheet more efficiently.
Cost/expense reduction. Steps to increase process automation and cosourcing/outsourcing of certain business functions may provide opportunities to allocate internal resources more efficiently, potentially reducing the cost base of in-force business.
Divestments. As already mentioned, insurers interested in divesting underperforming blocks with large mortality and behavior uncertainty should currently find no lack of demand from potential acquirers. The initial focus of such acquirers was often fixed annuities and variable annuities, but recently there have been several universal life deals, including universal life with secondary guarantees.
Based on an online poll during a recent WTW webinar, only 22% of respondents said they believe they have a systematic framework in place for in-force management. In addition, just over half said their efforts are organized by line of business.
This suggests to us there are unexplored opportunities within the industry for enhancing in-force management.
Nathan Hardiman is a Director in WTW’s Insurance Consulting and Technology Life practice. His background is in different modeling applications, particularly asset liability management. Nathan also has expertise in cash flow testing, reinsurance, M&A deals and litigation work.
