Overview: German life insurers face increasing financial and regulatory pressures especially in books which are closed to new business. Firms have several options to address the challenge, including in-house improvement programmes, outsourcing or the reinsurance or sale of the book.
Outsourcing has been held back by a data protection issue while the number of books acquired has been increasing although this still accounts for only 2% of the market.
The recent announcement of a change to data protection legislation should unlock the potential for BPO firms to work with closed book acquirers to provide a comprehensive solution to closed book problems.
The UK experience over the last decrease provides a model for Germany and could be the beginning of a key market trend, one which we predict could result in 14m closed book policies being managed in this way by 2020.
German life insurance market
Germany’s life insurance sector has low organic growth in premiums and high regulatory and solvency challenges. Firms must also battle against low investment returns and a high percentage of guaranteed products.
These pressures affect all lines of business and are especially acute for closed books, which become more expensive to administer and consume unwanted investment and management time.
Responding to the closed book challenge
Firms managing closed books have several strategic options; they can seek to increase efficiency through robotics and automation, but this is tricky as typically processes are not standardized across products and business cases are therefore hard to justify; they can outsource to a third-party, which should reduce costs and improve service or they could sell the book to another firm.
The emergence of the closed book consolidator
The last option has become increasingly common. Since 2013, seven deals have been completed to date, as shown in the table below:
Firm Acquired/ Acquirer(s)/ Date/ Assets (€Bn)/ Policies (‘000)
- Skandia Leben (CH)/ Life Investment Holdings/ 2015/ 1.1/ 200
- Heidelberger Leben/ Viridium/ 2014/ 5.2/ 600
- Delta Lloyd/ Athene Holdings/ 2015/ 4.6/ 350
- Basler Leben/ Frankfurter Leben/ 2017/ 2.6/ 100
- Protektor/ Viridium/ 2017/ 1.0/ 200
- Skandia Leben (DE)/ Viridium/ 2014/ 4.0/ 400
- Arag Leben/ Frankfurter Leben/ 2017/ 2.8/ 322
Total 22.3/ 1.572m
These deals represent around 2% of the total German market but the trend is attracting more and more interest.
A model for closed book developments – the role of BPO providers in the UK market
Acquisitions of closed books has been commonplace in the UK for the last 10 years and over 80% of deals involve a BPO provider partnering with the acquiring firm, which is usually a PE firm or reinsurer, drawn by the combination of stable, long-term returns which exceed the cost of capital, the potential to apply a consistent turnaround formula to businesses sharing the same characteristics and, given the fragmentation of the UK market, the number of potential deals available.
The chart below shows the UK market with over 20M policies being administered by BPO providers.
In the UK, the acquirers chose a BPO solution to guarantee lower costs (typically more than 30%), transfer risks, improve levels of customer service (a key Capita insurance client has an NPS of +43) and avoid costly systems upgrades.
UK market experience - partnerships between consolidator and BPO providers
Over 90% of all the UK policies that have been acquired are being administered by BPO providers. In addition to managing existing policies, they have also mitigated adverse publicity associated with “zombie funds”, a term used in the UK press to describe closed books with poor investment performance, high policy charges and harsh penalties for policyholders wishing to surrender their policy. Outsourcers have:
• Implemented control frameworks to ensure the compliance of all servicing and that closed book customers are treated no differently to those still open to new business
• Rapidly implemented responses to regulatory reviews of products sold and played the major role in thematic reviews by the UK Regulator, for example the fair treatment of long-standing customers and treatment of vulnerable customers
• Pioneered the use of a Net Promoter Score (NPS) approach to customer satisfaction.
The future German consolidator market?
We think the market will develop along the same lines as the UK, as shown in the chart below. This overlays on current deals two growth curves, one resulting in some 20% of policies (up to 14m) by 2020 and a lower curve, resulting in a 12% share.
Supporting the consolidator market – what role can BPO providers in Germany play?
A key inhibitor to growth in the life insurance BPO market has been s.203 of the Criminal Code, which restricts transfers of policyholder data to third parties. This restriction is being removed with effect from early 2018 and, thus, industry commentators are predicting a surge in the BPO market.
So, why outsource? Well, the answers to that frequently asked question comprise a rich set of benefits for the client:
– Expense and operating risk reduction and transfer; the economics benefits of outsourcing remain strong with more than 30% savings; the larger providers have recently added multi-lingual offshore and nearshore facilities to reduce costs further
– Customer service enhancement, compliance and improved customer engagement; a BPO arrangement mitigates regulatory risk, improves NPS and creates more loyal customers
– Flexible transformation approaches and pacing: BPO deploy their own technology solutions, work with IT partners or a mixture of the two
– Innovation; investment in digital capabilities, process automation and data analytics
– Flexibility; BPO partnerships allow “optionality” to the consolidator, for example by anticipating new acquisitions or planning divestments.
Whatever the pace of the market changes in Germany, it will almost certainly be faster than many of us think today. (vwh/mv)
Authors: Michael Mitterer is Managing Director of European Life Insurance at Capita (email: firstname.lastname@example.org), a transformation and outsourcing partner of the insurance industry John Connor is a Senior Commercial Director at Capita Europeope
Image: Michael Mitterer (source: private)