Closed Book Life Insurance: What You Need To Know

Closed-book life insurance policies are those that are no longer sold by the insurer but are still featured on their books as premium-paying policies. Closed-book policies are generated due to the discontinuation of unprofitable products or mergers and acquisitions. As no new policies are sold, the number of policies decreases over time, leading to increasing administration costs per policy. Closed-book life insurance is also referred to as a 'legacy book'.

Closed books are policies that are no longer sold but are still active for those who bought them

Closed-book life insurance policies are no longer sold to new customers but remain active for those who purchased them before they were discontinued. This discontinuation may be due to a variety of factors, such as low investment returns, management distraction, high costs of administering shrinking blocks, or the product no longer being profitable or strategically relevant for the insurer.

As a result of these closed-book policies, insurers face challenges in managing the remaining policies. The number of policies and associated reserves gradually decrease over time, leading to increasing administration costs per policy. To mitigate these challenges, insurers can either sell their closed books or retain them. Selling the closed books releases capital and allows management to focus on new business strategies and products. On the other hand, retaining the closed books until expiry requires implementing cost-reduction strategies, such as lean programmes, process standardisation, and data quality improvements, and outsourcing administration and IT systems to specialised providers.

The decision to sell or retain closed books depends on various factors, including the size of the insurer's closed books and their ability to implement cost-saving measures effectively. Outsourcing legacy books has been observed in the United Kingdom, where regulatory requirements pressured the life insurance industry's margins and costs. While some insurers sold their legacy books, others opted for outsourcing to specialised providers, taking advantage of their efficient processes and better IT integration capabilities.

Insurers retaining their closed books can benefit from solutions like Sapiens Closed Books, which offers a modern and cost-efficient platform for administering legacy portfolios. This solution provides significant cost reductions, improved operational consistency, a single view of the customer, and reduced reliance on outdated legacy systems.

Overall, closed-book life insurance policies present unique challenges and opportunities for insurers. By proactively managing these closed books, insurers can optimise their operations, reduce costs, and maintain customer satisfaction for the remaining policyholders.

Closed books are generated due to unprofitable products or mergers and acquisitions

Closed-book life insurance policies are those that are closed to new policy sales, except for contractually allowed increases. As no new policies are sold, the number of policies (and ultimately the size of the reserves) decreases over time, leading to increasing administration costs per policy. This is further exacerbated by the fact that most insurers are working with a patchwork of legacy systems, resulting in a relatively large fixed cost base.

Insurers may choose to close their books due to unprofitable products. For example, the Dutch Life insurance market is a mature and saturated market characterised by fierce competition and price pressure due to contracting demand for Individual Life and traditional Group Life products. As a result, the profitability of Dutch insurers has been under pressure for several years, and production volumes are further decreasing. One response has been to close new business for all or part of their Individual Life and traditional Group Life products.

Another reason for closing books is mergers and acquisitions (M&A). M&A deals with closed-book players can help insurers continue to create value. For instance, the acquisition of closed books can achieve economies of scale, reducing the cost per policy. In addition, the seller benefits from divestments because they result in freeing up capital at the group level.

In a declining life insurance M&A market, closed-book deals have become an increasingly important part of life insurance M&A in continental Europe since the first deal in 2012. Momentum accelerated from 2014 to 2015, with the deal count in the European Union overtaking that of the United Kingdom and Ireland combined.

Overall, closed books in life insurance are generated due to a combination of unprofitable products and mergers and acquisitions.

Outsourcing legacy insurance products can improve customer satisfaction and lower costs

Closed-book life insurance refers to "legacy books" or "closed books" of insurance policies that are no longer actively sold but are still being serviced by insurers. These policies can present operational and IT challenges for insurers due to their long time horizons and the potential for increasing administration costs per policy as the number of policies decreases over time.

Outsourcing the management of these closed-book life insurance policies can offer several benefits:

Improved Customer Satisfaction

Outsourcing allows insurers to focus on their core competencies and improve their strategic service offerings. By partnering with experienced outsourcers, insurers can benefit from improved customer service levels, including reduced response times and more efficient processes. Outsourcers are also more agile in staying abreast of new product and service offerings, enhancing the overall customer experience.

Lower Costs

Outsourcing legacy insurance products can drive down servicing costs through more efficient processes and better IT integration. Outsourcers can achieve economies of scale by servicing multiple clients simultaneously, spreading fixed costs over a larger volume of policies. Additionally, they can leverage their expertise in IT integration, process design, and workflow management to identify and address bottlenecks and inefficiencies. This can result in significant cost savings for insurers, allowing them to reduce their capital requirements.

Enhanced Operational Efficiency

Outsourcing relieves insurers of the burden of managing complex and outdated IT systems. By consolidating and streamlining legacy systems, outsourcers can improve data consistency and reporting, and overall operational efficiency. This enables insurers to focus their resources on new business strategies and products, enhancing their competitiveness in the market.

Reduced Capital Requirements

By outsourcing the management of closed-book life insurance policies, insurers can reduce their capital reserves associated with these policies. Outsourcers assume the day-to-day administration, including customer interactions, statements, and payouts. This converts uncertain operational expenses into guaranteed costs, providing greater predictability for insurers in their financial planning and regulatory compliance.

Focus on Core Competencies

Outsourcing allows insurers to focus their efforts and investments on their core business areas. By offloading the management of legacy products, insurers can allocate resources towards pursuing new opportunities with higher returns, such as developing innovative products or expanding into new markets. This strategic shift enables insurers to adapt to the challenges of today's dynamic economic environment.

In summary, outsourcing legacy insurance products, such as closed-book life insurance, can bring about a significant improvement in customer satisfaction and a reduction in costs for insurers. By partnering with specialized outsourcers, insurers can enhance operational efficiency, reduce capital requirements, and focus on their core business strategies, ultimately driving long-term success and sustainability in a competitive market.

Closed books can be sold or retained by the insurer

Closed-book life insurance refers to insurance books that have no new policy sales, except for contractually allowed increases. As no new policies are sold, the number of policies and the size of the reserves decrease over time, leading to increasing administration costs per policy.

Insurers are presented with two options when it comes to closed books: selling or retaining them.

Selling closed books

Selling closed books can result in a significant release of capital, which can then be used to support other business priorities. It also enables management to focus on new business strategies and products. This option has been exercised by insurers in the United Kingdom, where regulatory requirements put severe pressure on margins and costs.

Retaining closed books

If insurers choose to retain their closed books until expiry, they must focus on reducing the cost per policy. This can be achieved through cost reduction programs, investments in digitalization, and shifting product focus to hybrids and unit-linked solutions.

To reduce the cost per policy, insurers can:

• Implement Lean programs, process standardization, and data quality improvements.
• Outsource administration and legacy IT systems to third parties, converting fixed costs into variable costs and improving customer satisfaction through higher-quality service levels.
• Acquire closed books to achieve economies of scale, reducing the cost per policy.

In summary, insurers can choose to sell their closed books to focus on new business or retain them and implement strategies to reduce the cost per policy. The decision depends on the size of the closed books and the insurer's ability to manage the complex challenges associated with closed books.

Closed books can be supported by a reinsurance deal

Closed-book life insurance policies are those that are no longer available for new sales but continue to generate revenue from existing customers. These policies often pose profitability challenges for insurers due to decreasing premiums and the number of policies over time, leading to increasing administration costs per policy.

Insurers have a few options to address the challenges of closed books, including selling the closed book, retaining it, or acquiring other closed books. Retaining a closed book until it expires requires strategies to reduce the cost per policy, such as focusing on cost reductions, outsourcing administration and IT systems, or acquiring other closed books to achieve economies of scale.

Outsourcing legacy IT systems and administration of closed-book policies to third-party providers can help insurers lower costs and reduce capital requirements. This approach has gained traction in the United Kingdom due to regulatory pressure on the life insurance industry, which has increased margins and costs. While some insurers sold their closed books, others turned to outsourcing as a more efficient and cost-effective solution.

Reinsurance deals can play a role in supporting closed books by reducing balance-sheet exposure. Insurers can establish partnerships or engage in reinsurance deals to mitigate risks and improve their financial position. Reinsurance involves transferring some or all of the risk associated with insurance policies to another party, known as the reinsurer, in exchange for a premium. This can provide capital relief and risk management benefits to the insurer.

By partnering with reinsurers, insurers can spread their risk and gain access to additional resources and expertise. Reinsurance deals can help insurers optimize their closed books by reducing the cost per policy and improving overall profitability. These deals can be structured in various ways, such as through traditional reinsurance treaties or alternative risk transfer mechanisms, depending on the specific needs and goals of the insurer.

In summary, closed books in life insurance can be supported by reinsurance deals that help manage risks, optimize costs, and improve profitability. By working with reinsurers, insurers can access specialized knowledge, reduce their capital requirements, and focus on their core business strategies.

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