Life insurers and annuity companies are in an environment where competition is driving ongoing investments in IT to achieve economies in the back office. Jack Tyniec, senior manager with Deloitte Consulting and author of a new benchmarking study on life and annuity operations, believes the back office is a substantial expense for carriers. "There's a lot that goes on there, not only in the processing of new business but in processing and administering all the in-force policies and annuity contracts," he says.
Annuity companies are taking a proactive approach to put together standards and processes that link with vendors to try to make straight-through processing happen. This is similar to the way the securities industry has gone through a couple of iterations of order processing and execution, according to Tyniec. "Since the annuities business is a more streamlined process than life insurance, which has an underwriting component that can take up quite a bit of time, the annuities companies have been aggressive in trying to pursue STP," he says. "I know many annuity carriers are spending a lot of effort in looking to automate the upfront process of application, acceptance, and processing, all the way through to contract issue."
The Deloitte report shows operations and IT expenses together have decreased for annuities, but total IT unit cost for in-force contracts decreased at a lower rate. "That says to me IT expenses have not been decreasing as rapidly as total expenses," says Tyniec. "Therefore, operational expenses have been decreasing even more. I attribute that to investments in IT that have resulted in economy in the operations area. IT is contributing to the reduction of overall expenses and to operational expenses, as well."
On the life side, Tyniec reports the total of operations and IT expenses actually has increased. One of the biggest factors in that increase, he believes, is many of the largest companies in the industry have a large block of what he calls legacy policies. "They are old [policies] approaching the end of their contract lives, and those policies are rolling off faster than they can be replaced on a policy basis by new business," he says.
The average large company is losing a couple-hundred-thousand policies per year from its legacy in-force block, Tyniec suspects, and is replacing that business with only half the policies in terms of new business. "What winds up happening is every year that goes by, unit costs are going up not because of fluctuations in IT or operations expenses but because the denominator is going down and increasing unit costs," he says.
Large companies are in a difficult position because their in-force volume is going down faster than their new-business policy volume is going up, Tyniec explains. To keep their unit costs stable, carriers are challenged to be more aggressive in cutting expenses in both operations and IT.
Insurers also face the difficult challenge of maintaining legacy systems despite having a sinking pool of policies to administer on those older systems. "You still need to keep those old and difficult-to-maintain systems in compliance with needs and changes in the regulatory environment," says Tyniec.
Some of those systems are antiques, notes Tyniec. Language, database, and file structures have not always been brought up-to-date, and it becomes expensive and time consuming to change them. "The pool of resources that have those legacy skills also is in the process of retiring and disappearing," he says.
A fair part of a carrier's expense in the back office involves areas such as staff and call centers, and it is more difficult to reduce costs in these areas than it is to decrease purely system-based expenses. Companies feel they need to offer new products and seek new distribution channels to stay competitive, Tyniec points out, and this creates more demands on the back office. "Statistics for growth, even in premium volume, certainly are not in an aggressive double-digit range," he concludes. "Expenses still need to be kept down with all these factors in play. Those are real challenges for the industry."
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