How do life insurers manage the longevity of their closed book insurance policies?

28 Jul, 2022

One of the big challenges faced by life insurance providers is their closed book insurance policies.

These are policies that are no longer sold, but that remain in place and represent long running relationships between the insurer and their customers. 

From the outside, it may not seem like an issue. Insurance policies are much the same, so what is the issue with these policies being in place? What problems could they cause?

Those of us who work in and understand the insurance market know better.

Closed book insurance policies present significant profitability challenges. As the number of policies in the individual portfolios dwindles the administration cost per policy increases. It also usually means the insurer must maintain multiple IT systems that manage each closed book policy. Each time new legislation is introduced that affects life insurance every closed book policy must be reviewed, revised and kept compliant.

So why not rationalise these products out from time to time?

If only it was that easy. There is no legislation in place that allows insurers to ‘force’ customers into new products, they are entitled to remain with the policy they were sold for as many years as they live, or the duration of the policy, and plenty of people will do just that. Insurers can endeavour to ‘entice’ policyholders into new policies, but even if the new policy is better, many people just don’t like change. Even if you can get some of them to transfer across, some just won’t budge. And in a few years the current book will close, and a new range of products will come into place, restarting the issue.

It may seem counterintuitive to continue to bring in new products to market given the issues associated with the closing of old ones, however bringing in new products is key to winning new business. In the US, organisations that introduce more than five new products a year have a 9% higher growth rate on average.

Many insurers end up in a position where they have multiple in-house softwares to manage parts of their book. Each specific software has been designed to manage a particular book, including the benefits, policy updates, payouts and premiums. Each new product that is brought out has its accompanying software to manage it, but this software is generally not transferable between books.

In theory, this approach can work, but there are issues. It does allow each book to be specifically managed, but it does add a hefty fee to the bottom line and it doesn’t help when new insurance related legislation is released. Older software is also less likely to be able to integrate data, necessitating the need for manual data entry, which invariably leads to quality issues and errors.

The software itself will also become outdated, with a diminishing pool of professionals who can assist with any issues, and eventually, as with any legacy software, it will not have any support at all.

On average, the maintenance of closed book software accounts for almost 70% of IT budgets, it is not hard to see why efficient IT practices are thought to increase profitability by 1-1.5%. In 2015, global insurers spent close to US$101 billion on IT, a figure that will only increase as organisations continue to use aging software. The potential cost and risk of these legacy software systems failing are huge, alongside the loss of data and extended downtime there is the possibility of regulatory fines for failing to properly maintain policies.  

In a computer economics study last year, 100% of respondents listed system modernisation as their top priority.

But what if you had a software product that could manage all your policies in one place? Software that was so smart that it could support the management of every policy for the lifetime of that policy. Not only that, it ensures that companies are meeting their legal requirements.

At AMS, we are all about simplifying the complex, and this is what we do.

For over 30 years we have provided an insurance management platform that supports both modern, modular product and traditional products such as Endowment, Bonus Endowment and Whole of Life products.

Our software is incredibly complex, market leading, and highly specialised. 

But our clients don’t need to know this. 

What our clients know is that their book is safe, secure, and compliant in our hands. They know their clients are experiencing the highest level of service and the best experience that they can be provided with when they deal through our product.

Life insurance policies, quite literally, last a lifetime. If you want to make sure your policies can go the distance, contact us today and see how our software can help you manage the longevity of your book.