If the past is any indicator of what is to come, the recent burst of new annuity products and the debut of more deals between annuity carriers will be followed by closed block announcements. That is, the carriers involved will close certain blocks of business to new sales.
What do producers who wrote those older contracts need to do or know when they get wind of a new closed block? It’s a good question to ask since many are expecting to hear more such announcements as the year unfolds.
The answer depends upon the approach used by the carrier.
If done correctly, there is nothing that the producer/agent need worry about for internal solutions that the carriers adopt for closed blocks (or books) of business, said Karen Monk, an analyst in Celent's North American insurance practice who is based in Richmond, Va.
Those internal solutions are the focus of a new Celent report that Monk and Jamie Macgregor have co-authored. Macgregor is global senior vice president for Celent’s insurance practice and is based in London.
The report looks at types of solutions that annuity, life and pension carriers can use to manage their run-off business internally, while reducing operating costs and reducing the technology obsolescence risk over the long term. It doesn’t cover reinsurance approaches.
Little impact but…
“We believe there is little to no impact on the producer when a block of annuities closes,” wrote Monk in an e-mail, indicating that she and Macgregor did look at this question in response to an inquiry from InsuranceNewsNet.
In another report on closed blocks which the two analysts co-wrote for Celent last fall, Monk and Macgregor did see challenges and considerations for insurers, she indicated. But from the producer point of view, “we didn’t see much changing. The producer is still responsible for the customer; the producer still has the commission from the customer, and the producer still needs to service that customer.”
However, there are still considerations that producers will need to think through when a book closes.
For instance, when a carrier closes an older block, a producer “might want to consider selling a different product that is strategically in the sights of the insurer,” Monk said.
That could be a different product that the carrier already has available in the state where the producer does business.
It could also be that the carrier will debut a new version of the older annuity—often promoted as an enhanced version, even bearing the same name with version 2 or 3 attached to it. In some cases, carriers will offer an incentive to the customer to do a 1035 exchange from the old (now closed) policy into the new version.
A lot of annuity professionals tangled with those issues last year, when a number of variable annuity carriers announced market retrenchments, suspended sales for certain products or even market exits, usually in response to difficult market conditions that made support of the older contracts no longer tenable. A number of carriers did keep any closed business in run-off rather than selling it. Still, some producers objected, particularly if the suspended or closed business involved popular products. But most producers ultimately moved on to working with the new products if offered, while also helping clients figure out if anything needs to be done about the older (now closed) products.
When new versions come out, producers say they typically review the differences between old and new—and the incentives, if offered--and discuss the changes with the client before recommending a course of action.
“Unless the customer leaves the product all together, the producer is still the person managing the relationship,” Monk pointed out.
What if the insurer opts to outsource the administration of the closed book to a third-party administrator (TPA)?
“It is up to the insurer to notify the parties involved of the new outsourcing arrangement,” Monk wrote. “In that case, customer service will now be through an outsourcing partner/TPA, and the producer must be aware of this change and the new requirements.”
What about when the carrier sells an older block or does a carve-out to set up separate fund? That’s a “potentially a different story,” she said. “Then the producer/agent will need to worry about the stability of the fund going forward.”
For instance, she asked, “is the new entity financially viable and does it have the customer’s long-term interest in mind?”
The closed block has become a topic of conversation in recent years due to various economy-related pressures that carriers are facing. Carriers do need to generate an operating profit even though the global economic downturn is still taking a toll on operations, experts point out.
As Monk and Macgregor put it in their first report on the topic, published last fall, the impact of the financial crisis, increased regulation and the reality that many older products are running on legacy technology has impacted insurers’ financial performance and agility across mature developed markets.
Those factors have been leading insurers to ask what they should do about the managing products that they no longer consider to be strategic. (Another reason for closed blocks is discontinuation of an unprofitable product.)
This search involves not only what to do with closed annuity blocks but also closed life policy and pension blocks.
The amount of business involved is not insignificant. Last year, Celent estimated that 40 percent of premiums written primarily in United States and United Kingdom markets were derived from non-strategic or closed blocks.
Differences in definition of a closed block and also the lack of public information communicated around closed products play a role in that measurement, Celent pointed out. (Celent defines closed blocks, or books, as policies that are no longer sold actively, but are accounted on the financial statements of a life carrier as premium-paying policies.)
“Ninety-two percent of insurers we spoke to highlighted that a change in strategic focus was one of the top three reasons for closing a block,” said Monks in last year’s report.
“Most insurers claim to have an active strategy in place to manage these blocks,” she said then. “However, the most popular strategy continues to be managing the run-off internally using current systems. The cost of continuing ‘as is’ with this strategy may be too high for many as they look to reduce future liabilities and costs in line with reducing block size.”
In last year’s report, the Celent analysts said they believe that many insurers will begin considering “alternative accelerated solutions involving either the sale or transformation of the business that supports the closed blocks.” In addition, they pointed out that a growing number of “proven technology propositions “ now exist that carriers can employ as part of a “transformation” of the book, without the need to sell or outsource.
Now, in the 2013 report, Monks and Macgregor look at some internal solutions that various vendors are offering. These include consulting and advisory services, business process outsourcing and technology transformation.
Insurers need to exercise care supported by effective due diligence when selecting a vendor partner, cautioned Macgregor. “With multiyear deals and the long tail associated with closed block policies, the cost of selecting the wrong partner could have a far-reaching impact on the shareholder, policyholder and regulator.”
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