Actuarial outsourcing of legacy block operations

What are legacy blocks?

Most large life insurance companies, especially ones that have been in operation for a long time, have portfolios of businesses that are no longer sold in the market. These so-called “legacy blocks” vary in size and complexity but are to be run off, often over many years.

As legacy blocks decline over time, they can become burdensome to manage, because decision makers will prefer assigning actuarial resources to other, strategically more critical issues. However, these legacy blocks cannot be ignored. Companies would need to manage claims (often with a need to manage cash dividends or bonuses) and to include such blocks in routine regulatory reporting and audits. A sustainable and cost-effective long-term strategy is necessary to handle the runoff of these legacy blocks over a long period.

Why outsource legacy block operations?

A proven solution to this problem is outsourcing all or some actuarial functions associated with legacy blocks to a trusted service partner. It will help manage these blocks more efficiently, allowing valuable internal resources of the company to focus on more core, strategic aspects.

Business as usual (BAU) regulatory and financial reporting are primary, routine functions that can be outsourced. Established processes around these functions can help smoothly transition the work to an external team. This can be extended to the maintenance of actuarial models, including updates necessary to incorporate ongoing changes to financial reporting frameworks.

In addition to BAU reporting, it is vital to understand the emerging experience from legacy blocks in order to manage current and projected profitability levels and take remedial measures to mitigate negative impacts. For example, actively managing a legacy block by implementing a rate revision in accordance with policy conditions can cushion the effects of adverse claims experienced in aging portfolios. Experienced actuarial outsourcing teams can provide the technical and business skills necessary to help a company actively manage legacy portfolios, working where necessary with the company’s internal resources.

Partnering with an actuarial team with a sufficiently large resource pool, with appropriate experience and domain knowledge, provides the flexibility to increase or decrease team size (both internally and at any third parties), as necessary, in line with work requirements, with the outsourced team dedicated to managing the legacy blocks. On the one hand, allocating limited internal resources to monitor and manage legacy blocks may not be optimal. On the other hand, it is difficult for companies to retain resources allocated to noncore operations, thereby losing valuable domain knowledge over time. Outsourcing legacy block operations makes it possible to transfer and retain this knowledge within dedicated resources.

Another key benefit of outsourcing actuarial work is the potential to increase efficiency through automation. While companies rarely allocate time and resources to develop new technology to improve the efficiency of managing closed blocks of business, a third party can be incentivized to use available technology solutions to improve efficiency. This will ultimately lead to the production of more accurate and reliable results in less time.

How has outsourcing legacy blocks been beneficial?

There are many case studies of insurance companies and aggregators of legacy closed blocks outsourcing BAU operations to reap many benefits, including efficiency gains and cost reductions.

We have experience working with a company that has outsourced BAU operations on multiple legacy blocks with the objective to increase efficiency. Actuarial expertise within the service provider’s team, quality of deliverables, professionalism, ease of communication, and data security were among the many considerations for the company prior to selecting an outsourcing partner. The scope of the assignment includes the production of quarterly results, business plan projections, and sensitivity analyses. Our outsourcing team works remotely on the insurer’s network to ensure data security and confidentiality, and to ensure that we follow the client’s processes and governance framework. The client’s in-house staff has been able to focus on more complex and strategic objectives while being confident that the ongoing outsourced reporting will be delivered efficiently on time, without compromising on quality.

In another example, a client outsourced all actuarial functions other than the Appointed Actuary role to us to efficiently integrate and restructure its operations following an acquisition. The post-acquisition collaboration evolved into three phases. Firstly, it involved scoping, during which we undertook an extensive review of actuarial processes to uncover potential risks and issues, identifying necessary actions for remediation. Secondly, the work was transitioned through parallel model runs and finally scaled up to provide all BAU services. The client has successfully streamlined the business and reduced the cost and time spent in setting up and managing a new actuarial team. It was content that the processes were robust and produced accurate results post-acquisition.

To sum up, in both cases, the clients were relieved that the results would be delivered on time and without compromising on quality. Our ability to support related projects, including model development, implementing new reporting requirements, and conducting ad hoc analysis while meeting governance requirements has helped them achieve their business objectives.