Written by Jon Dean on Monday 12 May 2014
In my last article I talked about the risk that wave upon wave of new regulations could jeopardize investment in new “at retirement” solutions. Reinforcement in the 2014 budget that no-one need buy an annuity any more has not removed the customer need for a steady income. This presents an opportunity too big for any insurer or wrap provider to ignore, and means further investment is essential. Even if customers don’t want annuities, these questions remain; what will the replacement products look like, and who can build the most cost effective and sustainable solutions?
Often the first challenge is to understand what makes a cost effective product. Some of our clients ask us to help them calculate the total cost of ownership of their technology – a significant proportion of product run costs. From an inventory of all the software, communications infrastructure, hardware and support contracts we are able to identify the annual running cost of each individual business application and ultimately, an IT cost per policy – the holy grail of information for any CIO.
Most revealing about this information is what it reveals about a life company’s back book of business – products which generated sizeable profits in their early years are now an increasingly costly millstone as fewer active plans must now be supported on ageing technology. These legacy IT platforms are often out of support, comprise a host of “bolt-on” applications developed in departmental silos and the experts who know how to maintain them command a considerable premium.
One solution to rising costs per policy is outsourcing the application development and maintenance to an offshore partner. We have also seen closed books sold to consolidators such as Resolution or Phoenix, who migrate these policies onto lower cost technology and benefit from economies of scale. But wouldn’t it be better to future proof the product designs?
The fundamental challenge with retirement savings products that renders them unlike any other product we buy in life is their lifespan. Pensions have always been a long term savings plan spanning up to 50 years of working life, converted at retirement into another long-term product (the annuity) for maybe another 30 or 40 years. Now they can last literally cradle-to-grave, with enlightened parents starting a personal plan for their babies that could theoretically go straight into drawdown with the same insurer 70 years later. That product lifespan is longer than insurance companies have been using computers. How many times during such a period will that policy have to be moved to a new system? Crucially, how many product designers factor migration cost and complexity into the pricing of a new product? The issue of rising cost per policy will persist as long as the industry continues to build long-term savings products using a 3 year business case.