Industry surveys reveal that Modernization of legacy platforms will be a high priority activity for a large segment of the Insurance Industry in 2022 and beyond. Given the significant merger and acquisition activities over the past decade, and the aging nature of the technological platforms for most policy administration systems, this should not come as a surprise to anyone. While new Life and Annuity products can be designed with features and functions that are fully supported by the most current version of a COTS (commercial, off the shelf) PAS (policy administration system), or the cost of customization is easily justified in order to offer product features that provide market differentiation. A closed block is a version of a product that was sold in the past but is not currently sold. The offering has either been discontinued or replaced by a newer version. The choice of the optimum approach for modernization of closed blocks of business presents much more of a challenge.
Software vendors encourage clients to convert all policies from all legacy platforms to a single new target platform. The argument is that it is easier to just convert everything than invest in the analysis to convert only what is needed. Furthermore, having everything in one form on one platform provides the richest source of history and the cost of storage is cheap. Companies that have taken the “convert it all” have suffered the pitfalls of this approach:
- Customization requirements and the complexity of mapping data fields and values from multiple sources to the single target platform have escalated costs and time.
- History may need to be recreated since the set of values that are stored vs. calculated vary among systems. Data quality and completeness must be addressed upfront.
- Data calculation routines (sequence, rounding rules, etc.) are not uniform among systems. Before and after values don’t always match.
Other companies have chosen to leave closed blocks of business in place on the legacy platforms and only consolidate open blocks on a single target platform.
But… there is a cost for doing nothing.
The technology obsolescence is not going to go away even if you “freeze” the legacy applications. The complete platform that supports the full policy lifecycle extends well beyond the policy administration application. The web of interfaces (i.e. ecosystem), some of them shared by open block policies, must be maintained. Training costs, consolidated reporting requirements, manual work-arounds, and regulatory compliance challenges for closed blocks left on a legacy platform present a much more significant issue to the corporation than the software license costs for legacy policy administration systems. These closed blocks are not isolated from the customary policy maintenance functions driven by temporal and customer service events.
Many of the closed blocks are in fact excellent candidates for automated conversion as a Modernization solution. But for those that are not, some approach to Modernization should be considered. Several other Modernization Options exist. These include but are not limited to:
- Tactical Service Solutions
- Selected Functions Delegated to loosely coupled Surround Applications and Services
- Archive History and Go Forward on the Target Platform
- Manual Re-Keying on the Target Platform
- Outsource Servicing (BPO)
- Re-write the policies to a current offering
- Sell the Closed Block
- Leave as is but apply a technology modernization to the Legacy System
CAPCO has found that there are twelve attributes of each Closed Block that should be examined and rated:
- Total Policy Count by Block/Product Family
- Inforce Policy Count
- Inactive/Termed Policy Count
- Paid Up Policy’s
- Plan Code/Block Status
- Premium Value
- Strategic Need
- Alignment with New Products
- Historical Retention Requirements
- Variance from Target PAS Base
Each of these 12 attributes must have supporting detail to substantiate a relative “score” for complexity. Each attribute can be viewed and analyzed with 6 main dimensions:
To these rating outcomes, weights can be applied that represent current business priorities and strategic direction. A matrix of Modernization Options vs. Closed Block attributes populated with the weighted ratings presents a simple but compelling picture of which Modernization approach should be considered for each Product Block. This assessment should look at the product features, testing requirements (technical and business), interface complexity and operational impact/change.
The exercise to perform this study can be completed in a matter of weeks. Metrics produced provide an important baseline for measure and the approach is consistent. Although many manufacturers say “we have done this before”, the odds of them repeating this analysis consistently over time, are low.
So, why assess in this manner? The answer is simple: cost and risk savings.
Consider that a portfolio has 3 product blocks (example: 25,000 closed perm products running on Data Life, 500k policies VUL on Cyber Life, 750k 20yr Term on Vantage) running on a legacy platform (mainframe) could cost from $20M to upward of $75M to migrate to a modern PAS. This is a manufacturer-realistic range; you have to test the data that moved, but also all of the interfaces (biggest cost/risk in this exercise), financial reporting (including statements, illustrations, audit, etc), post-issue ops (fund exchange, bene change, loans, etc.) and finance treatments (i.e. MEC, regulatory requirements). PAS software vendors will tell you “it’s simple – 6 months and done”. It is never “simple”.
Now consider analyzing and slicing this into pieces, simplifying the problem. Each block has a different approach. Instead of converting 1.2M policies, you convert 500k to your desired PAS. The others are maybe re-written, left as is, or even divested. You have then saved from $10M to $35M and dramatically controlled risk.
The cost to perform this study is miniscule compared to the cost of doing nothing. Analyze before action… or in-action.