Confidential
Closed book strategy The outsourced option?
Ian Betley
VP, International Head of Sales
DSTi Holdings and IFDS Group
2 Confidential
Agenda
• Introduction and overview of IFDS
• A brief history of closed book in the UK
• Challenges and successes ?
• Case Study – Old Mutual
• Sample Case Studies, Phoenix and Hartford Life
• What does next generation look like ?
• Insurer demands
• Market Sector influences
• The impact of technology
3 Confidential
A bit of background
• Myself • 20 years in Financial Services outsourcing – including technology replacement, rationalisation,
ITO, BPO, offshore, transformation
• Working with approximately 10-15 insurers per year solving their problems or supporting their opportunities
• Current initiatives
• Pan European DC Pension solution for major global provider (IORP)
• Rationalisation of 4m closed policies across 9 (so they say) systems and 720 products
• Consolidation strategy for combination of private Equity provider and Reinsurer of annuity closed books
• Who are IFDS • Europe’s largest provider of insurance and investment administration services with 60% market
share in the UK (16m customers across 205 clients)
• Owned by State Street Bank and DST Systems
• Rapid and successful service diversification into Life and Pensions and Wealth Management over the last 4 years
• Completion of 4 next generation outsourcing deals in the last 3 years with 2 more imminent this year
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IFDS Update At a glance What do we do? At IFDS, we offer a range of outsourced administration and technology solutions to financial organisations. Acting on your behalf, we provide solutions to serve your end customers, delivering the same passion and great experience you expect within your own organisation.
Where do we operate? We operate in many of the world’s key financial markets, with an extended network accessible through our parent organisations DST and State Street. This means we have the scale and global footprint to provide innovative and sustainable servicing models to continually meet your evolving needs.
Who are our services for? Our solutions are tailored for: asset managers, asset gatherers, platform providers, wealth managers, banks, credit unions, trust companies, insurers, re-insurers and life companies.
• Operating for over 40 years in US • 20 years experience in Europe • 380+ clients serviced globally • 47.5m accounts administered worldwide • c. 8,000 employees • No.1 transfer agent in Canada, Ireland,
Luxembourg, UK and USA
• 2nd oldest US financial institution • Responsible for holding and / or
managing 12% of the world’s assets • $28.19tr in assets under custody • 29 countries. 29,000 employees
• 97.4m accounts serviced • 7.1m Retirement accounts • Business process management technology • Customer communications • Data analytics and insight
5 Confidential
Who are we? A global enterprise
Our Business Process Outsourcing (BPO) services operate in 17 countries across 4 continents. We support over 400 clients worldwide through our network of c.8,000 employees
Asia-Pacific Australia Hong Kong India Japan Singapore Taiwan Thailand
Europe Austria France Germany Ireland Italy Luxembourg Switzerland UK
North America Canada USA
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Providing services to the market
6
Group product delivery
Investor record-keeping
Platform and wealth
management solutions
Policyholder servicing
Distribution support services
Custody
Fund accounting and valuations
Trustee and depository
Middle office outsourcing
Business process management
Customer communications
Data analytics and insight
Pension and actuarial services
7 Confidential
Some of our clients
8 Confidential
The UK life sector is evolving…so what’s happening?
• Solvency II Directive
• Auto Enrolment • RDR • OFT Review
• FCA Retirement Income Study feedback
Pre 2014 2014
Q1 Q2 Q3
2015
Q1 Q2 Q3
2016
• FCA thematic review of treatment of legacy customers
• Workplace pensions fee cap • Budget announcement on annuities • FCA Retirement Income study
• Removal of Life Assurance Premium Relief • New pensions freedoms • FCA thematic review of fair treatment of legacy
customers feedback
Regulation has been the leading driver of change in the industry – Increased focus on closed books
• Solvency II preparation and implementation
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Closed funds are facing a significant uplift in complexity and cost
• Long term political focus on accumulation / decumulation / support in old age
• Peers will be challenged by cross –subsidisation of
open and closed books • Increased regulatory focus is here to stay • Most legacy customers are now orphaned from
advice - decline of direct sales forces • Focus on legacy products – customer outcomes and
service levels
Regulation / Legislation Challenges for closed funds
x Legacy products are complex to administer and manage
x Increased regulation may lead to requirement for further system investment
x Legacy book migrations are complex and expensive
x Fixed cost pressure as book runs off
x Requirement to maintain specialist expertise
x Risks to persistency given new pension freedoms
Absolute need for a next generation outsourced operational model
10 Confidential
The ‘real’ challenges
• Legacy technology with poor quality data
• Spaghetti of systems caused by mergers and tactical solutions
• Processes embedded in peoples heads, with many manual workarounds
• Stagnation of the working population
• Poor quality staff – with no design or implementation skills
• Lifers in the business
• Union protected
• Public Sector / Fiefdom culture
• Short-termism view of any change or transformation
• Driven by shareholders and executive bonuses
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The market demands
What does an insurer and an outsource partner need to consider ?
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UK market landscape
0
10
20
30
40
50
60
70
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Policies (m)
Policies (m)
UK L&P TPA market growth by number of policies outsourced …
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Up to 2004, the market consisted of mostly small, closed book deals and was served by a number of suppliers battling to get to 1 million policies – ‘same mess for less approach’
L&P Company TPA Provider Deal Value Deal Type Year # of Policies (Approximate)
Lloyds TSB (Abbey Life) Unisys/UISL £60m Traditional Outsource. Subsequently acquired by Deutsche Bank and outsourced to Capita
2000 1.7m
Barclays Schroders N/a GPP green-field outsource 2000 N/a
JPMAM - Save & Prosper Liberata £60m Traditional Outsource - with migration costs included in cost per policy
2001 350k
GE Pensions Group MSG £11m Traditional Outsource – admin of various portfolios of pension related policies over expected five-year term
2001 70k
Sun Life Financial of Canada MSG £95m Traditional Outsource - with 550 staff transfer plus systems implementation
2002 800k
Lincoln Financial Group Capita £160m Creative Partnership - share in business growth over 10 years 2002 900k
Prudential JLT & Hazell Carr N/a Group Pensions 2002 N/a
Barclays/Woolwich Liberata N/a Evergreen deal 2002 1.5m
AXA Sun Life Liberata £50m Axa Equity & Law Closed Book 2002 800k
AMP Hazell Carr £35m Group pensions closed book 2003 100k
Royal Sun Alliance Unisys >£300m Multi-location lift-out creating largest FS TPA deal in Europe at the time
2003 2.8m
Zurich Life Admin Re N/a Post sale to Swiss Re 2003 230k
Liverpool Victoria EDS £109m 13 year deal for open and closed book. Subseuently brought back in-house
2004 600k
Prudential International Capita n/d Dublin based operation for administration of UK sold offshore business
2004 400k
Children’s Mutual Capita £430m Creation of utility to provide CTF servicing to CM and others 2004 New venture
UK market development Phase 1
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From 2005-2010, deals increased in size, included more open books and the market became dominated by Capita with circa 26 million policies – rationalise and offshore
L&P Company TPA Provider Deal Value Deal Type Year # of Policies (approximate)
Pearl TCS (Diligenta) £486m Collection of closed books acquired by Pearl 2005 3.8m
Living Time (AIG) Vertex n/a Launch of new virtual life company 2006 n/a
Zurich UK Life Capita £300m Closed and open book. Planned future product development on Elixir platform
2006 2.8m
Aviva Swiss Re n/a System consolidation and cost reduction play 2007 3m
Prudential Capita £722m Predominantly “mature” (closed) L&P book. Capita also acquired PPMS (Mumbai)
2007 5.5m
Resolution Capita £580m Collection of mostly closed books acquired by Resolution. Resolution since acquired by Pearl. Scottish Provident since sold to Royal London
2007 4.5m
CFS Capita £270m Open book and future product development 2007 4.5m
HSBC Life Vertex n/a Support for new product launches 2007 n/a
Deutsche Bank (Abbey Life) Capita £130m Closed book acquired from LTSB in 2007 2009 1.1m
AXA Capita £500m Closed life and pensions book 2009 3.2m
Equitable Life HCL £120m 30 year deal to cover areas such as IT operational support, policy administration and financial, actuarial and call centre
2009
UK market development Phase 2
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Since 2010, the most significant deals in the market have effectively gone to new entrants... All have a closed and open book approach
L&P Company TPA Provider
Deal Value
Deal Type Year # of Policies (approximate)
Friends Life Diligenta £1.37bn Diligenta’s first competitive win since the Pearl and Phoenix acquisitions. Closed book protection business and significant part of its corporate benefits business
2011 3.2m
AEGON Serco £170m Closed and open book. Protection business Serco’s first entry into L&P
2012 500k
St James Place IFDS £1.0bn 15 year deal for legacy book and new retirement wealth platform
2013 800K+
Old Mutual Wealth IFDS £1.2bn 20 year deal for outsource of closed books, new business and wealth platform
2013 1.1m+
UK market development Phase 3
2015+ = Phase 4 The large outsources are unlikely to continue
16 Confidential
Key requirements for success in the closed life consolidation market
Operating model
Customer focus
Variable cost base supported by outsourcers
Ability to migrate legacy books
Build and retain specialist expertise
Demonstrable focus on product
governance
Improve customer Outcomes and
experience
Ability to source range of new products for
customers through the customer
lifecycle
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TPA key selection criteria
Company level Solution level
(varies by proposition)
• Corporate strength and
strategy
• Corporate culture and fit
• Pricing and commercials
• Implementation risk
• Risk management and
controls
• Business solution
• Operations and service s
• IT
• People
• Technical (product)
expertise
• Regulation
By analysing multiple deals in recent years, typically you can identify a number of key criteria used in selecting TPAs…
The key components that have historically been missed out in selection are: Customer experience and retention
Contract sustainability and future cost of ownership
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One approach to segmenting the UK market (in terms of both deals and competitors) is by level of process-driven vs systems-driven rationalisation…
Significant
Significant
Low
Low Platform Rationalisation
Pro
cess
Rat
ion
alis
atio
n
UK market segmentation – outsourced positioning
Transformational change including
process and platform
rationalisation
New Products
Niche
Process rationalisation
on current platform
IT system consolidation
programs
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Comparison of Market
Capita IFDS Diligenta HCL Liberata
Cost reduction
Operational efficiency
Flexibility of service model
Breadth of technology coverage
Risk & compliance framework / control
Proven Migration Capability
Brand / reputation
Future TCO/ Contract Sustainability
Ease / cost of exit
Focus on FS Industry / appetite
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Offshore ITO BPO Transformational BPO
Continuous transformation
/ GBS Outsource Maturity
Val
ue
ad
d
Same mess for less Sustainable value
Supplier / Partner evolution
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0204060
80
Cost benefit
Benefit Impact across the maturity model
Transformation
Same mess for less
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The evolution in policy administration costs
0 10 20 30 40 50 60 70 80 90
Corporate Overhead
Operational Cost
IT Cost
Remember – outsourcing is not just about the administration
staff – the real value is when you can reduce actuaries, legal,
compliance and senior management !!
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So how has it gone ? • 80% of the contracts are unsustainable and clients are unhappy with the
outcome
• They have failed due to • Inability to migrate / rationalise platforms (Prudential)
• Inability to change due to legacy – same staff different employer (Liberata)
• Poor knowledge transfer has led to programme failure or added cost to buy back in the knowledge (Friends Life)
• Contracts badly written
• Old processes implemented – cost of keeping lights on too high
• Staff protected against redundancy / performance management (Aegon)
• Short term view on cost certainty with too many dependencies on building scale or driving out efficiencies
• Consequences
• Margin pressure by outsourcers lead to poor customer service
• Stagnation and no thought-leadership innovation or drive for improvement
• Treated as a wasting asset – now performing as a wasting asset – or the value has been bled out of the books
• High risk from regulatory change
24 Confidential
Successes - Skandia
Skandia have signed a twenty year contract to partner with IFDS, to further outsource a significant proportion of their processing, administration and technology.
Skandia is part of Old Mutual Group who is one of the world’s largest life insurance companies.
This contract builds on our existing relationship with Old Mutual and will enable Skandia to replace a number of administration functions and the majority of its UK platform plus Retirement and Insurance Solutions (RIS) technology
This agreement will enable us to continuously improve the service we offer to financial advisors and their clients, introduce new products as well as meet our financial objectives. The IFDS technology will ensure that we can respond to adviser and customer needs faster than we can today and will results in new functionality and greater flexibility to be delivered to advisers via the UK platform.
Paul Feeney, Chief Executive
“ “ 20 year contract On the grounds of a strong existing relationship, successful track record and the ability to demonstrate how to transform Skandia’s business – longest contract of it’s kind
2016 go live The integration of IFDS administration, processing and technology is due to start in 2016.
25 Confidential
Heritage SIS (1)
Heritage SIS (2)
Heritage
Policy Admin
Special Deals
New Business
Contact Shared Service Doc Management
IFA / Network
Web (60 Portals)
Mail Direct
Network Overlap
Heritage SIS (3)
Claims& New Bus
IFA Network
Wealth Interactive
Wealth (New World)
• Legacy systems • Poor data quality • Expensive to maintain • Policy centric • Increasing risk • Slow speed to market
• Manual processes • Lack of control and quality • Inefficient operational
management • Spaghetti of tactical solutions
• No channel management or single customer view
• Poor customer service levels and work turnaround
• Unable to enforce self service • 60 portals of various tactical
solutions with poor user experience
• No brand consistency • Competitive disadvantage
Skandia ‘current’ model
26 Confidential
D2C Option
IFDS PERCANA DST BLUEDOOR
AWD
IFDS BUSINESS PROCESS OUTSOURCING
Transfer of customers
• Modern technology on a multi-tenanted environment
• Quality data • Significantly lower TCO • Future-proofed for legacy /
closed books • More relevant and faster
speed to market
• Industrialised BPO • CI and best practice • AWD acts as control • Exceptional customer
experience • Shared service benefits
• Single customer view • STP and self service • Opportunities for targeted
campaigns • Increased customer insight • Customer stickiness • Upsell / cross sell
Skandia ‘to be’ model
Wealth Network
Heritage Network
DST Bluedoor Portal
USE
RS
Port
al
Bu
sin
ess
Po
rtal
Su
rro
un
d
CO
RE
syst
ems
27 Confidential
Flow of the key buying criteria
Standard service Customer retention
OMW focus on customer experience
Lowest cost per policy
Embedded value
Upsell / transfer
Integrated heritage and wealth
High offshore
leverage
Protecting the oval brand and reputation
The value of the joint Oval / IFDS / State Street brands
Same mess for less
Shift and Lift then transform
Transformational BPO
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Increased client value, shorter L&P supply chain
Customer
Policy administration
admin BPO IT platform
IFDS UK
DSTO IFDS
Percana
DST Global
Solutions
State Street Syntel
Services
DST PAS
Hang- Tien
Services
Fund administration
admin Accounting Custody Trading
State Street Bank & Trust
Investment market
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The Closed book opportunity
The Legacy / Closed books
There is no such thing as a legacy customer there are only legacy products
Inforce customer Segmentation
Product swap
Upsell / Cross-sell
Retain and Serve
Lowest Service Cost
Transfer to wealth
30 Confidential
Closed book – release the embedded value
Low Value but potential
Upsell and Cross-sell more products
High Value in Transition
Engage & Transfer to wealth platform
Offer new products for at and post retirement
Low Value
Service at lowest cost of ownership
High Value
Engage protect and provide excellent customer experience
Closed Book
Strategy
Assets Under Management
Customer Insight
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Focus on asset retention and embedded value
0
200'000
400'000
600'000
800'000
1'000'000
1'200'000
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Lapse 9%
Lapse 11%
Added value
Difference in total policy years over 10 years at 9% lapse rate to 11% is just under 1,000,000
TIME
AV
. CO
ST P
ER
PO
LIC
Y
32 Confidential
Retention Case study based on 1m policies
Outsourcer A IFDS
Average Single Premium £40,000 £40,000
Annual Management Charge 1% 1%
Outsourcer Annual Policy Fee £15 £20
Annual lapse Rate 11% 9&
Internal Renewal Expense £25 £25
First Year Gross Margin £400 £400
First Year Net Margin £360 £355
Risk Discount Rate 10% 10%
Annual Discount Factor 0.81 0.83
Embedded Value Multipliers 5.24 5.7
Embedded Value/ VIF £1885.71 £2055.26
Net Gain Per policy in Force £169.55
Increasing the embedded value by increasing the service and increasing the retention rates
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Combining new and the old - what could this look like ? Assisting our clients’ business evolution
• True transformation of operating models to one that can absorb business change incrementally and fluidly, instead of requiring periodic step changes and transition projects.
• We can service both old and new worlds and enable a customer centric view across all books of business
Upgrade of closed book or open book customers to wealth platform services (e.g. as wealth increases with age or third party assets are captured and consolidated)
Closed book customers becoming open book or wealth customers (e.g. up-sell / cross-sell), capture of third party investment assets or insurance covers, especially on life events)
Wealth customers becoming open book or closed book customer (e.g. wealth services are no longer required by the customer as asset values decline)
Open book or wealth customers becoming closed book customers (e.g. product closure)
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Driving value out of closed book
• Consistent brand control across all the business and channels
• Economies of scale across group operations and systems
• Retention, customer stickiness and propensity to consolidate wealth
• Future-proof the legacy model on modern technology, which will continue to evolve
• Opportunity to manufacture products and sell into platform (e.g. Life, annuity, 3rd way products)
• Transfer of customer assets to the wealth management platform allowing the up-sell and cross-sell of additional products (research shows additional 30% propensity)
• Lower capital requirements, and more capital efficiency in respect of Solvency II
• Ability to sell third party products into the client base
• Easy absorption of acquired businesses, distribution channels and segmentation between the core and non-core customer base
• Drive better and more sustainable commercial deal wit the outsource
Retention benefits of the integration
of new world and heritage
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• “The commercial ambition to outsource is to gain efficiencies, introduce automation to reduce manual processes and bring staff numbers to the optimum level to run the business as it runs down “
Ciaran McGettrick CEO
• “IFDS’s state-of-the-art technology platform offers a superior proposition. We’re confident this move will ensure our customers continue to receive the quality of service they have come to expect, well into the future”
Alastair Murray – CEO
Closed book case studies
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How will you address the challenges ?
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The two conflicts of interest
An insurance policy, retirement investment is
for Life
A executive bonus package is
annual
Faster
Cheaper
You can only have any two
Better
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The two conflicts of interest
An insurance policy, retirement investment is
for Life
A executive bonus package is
annual
More complex
Cheaper and faster
You can only have
one !
Customer Experience
and outcomes
Actuaries and IT
Procurement and CFO
Sales and Distribution and the Regulator
Oh!.... and the policyholder
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How can you make real transformation happen with so many conflicting priorities ?
What Drives
Successful Business?
CEO
Shareholder Value
CFO
Controllable Cost Base
Chief Actuary
Product Design
CTO
Modern Technology
Stack
CIO
Digital / Multi-
Channel
COO
Operational Streamlining
Marketing Director
Distribution
Tactical Tinkering?
Strategic Alignment?
CUSTOMER
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Phase 4 - So what’s happened in a year?
• Digital + / Data Driven Experience
• Roboadvice
• As-a-service
• Collaborative Utility
• RPA
• ………….and Fintech is here
Example RPA
Nearshore / Offshore €12000
Robot licence and run €4000
3 shifts per day € 1350
Current Administrator €30000 pa
41 Confidential
Op
tim
isin
g re
ven
ue
op
po
rtu
nit
ies
Customer Insight
Orphaned product holder
Policyholder
KYC Know your customer
Customer Centric (SCV)
Customer Lifecycle
Customer, family or
community
Transactional& Scheduled
ST Person
Customer e-cosystem Workplace, Education, Planning, communities
Family, Tax, Advisor ST Profits
Automation Enablement ST Process
Offline ST
Postbox
Paper Online ST Printer
Lower cost of client servicing
Conclusion : The more you know about your customer the more you can sell. The more the customer engages the more you can automate and the cheaper they are to administer.
Digital maturity and the definition of STP Where are you on this line ?
42 Confidential
Heritage administration model Retirement and Insurance Solutions
Investor/advisor
Opendoor website Contact / front office
Telephone calls
E-mails Retention Complaints
Documents in
Policy servicing Document
s out New Business
Client services
Money out
Client finance
Post in
Scanning
Indexing
Cheque banking
Regulatory reporting
Technical corrections
Periodic processes
HMRC rebates
Operations fraud controls
Chargeable events certs/reporting
Daily correspondenc
e
Ad-hoc correspondenc
e
Bulk and ad-hoc mailings
Technical
Underwriting Return of Legal/ AML docs
New Business Applications
Transfers in
Top Up Processing
Annual Reviews
Annuity Admin
Divorce Triviality Small Pot
Commutation
Deceased Maintain Pensions
Drawdown
Serious Ill Health
Partial surrenders
Full Surrenders
Transfer Out Cancellation
Regular & Ad-hoc RIF
Payroll Maintenance
Reinstatements Written Enquiries
Adviser Servicing
Client Maintenance
Illustrations Quotations
Legal Documents, assignments &
Trusts
Group Pensions Maintenance
Premium Servicing
Switch Redirection
AML Servicing
Investment Administration
Archiving
Plan servicing
Arrears
Term adjustments
Sum assured adjustments
Cover basis admin
IIP Portal
Groups
Group
Web
CI & Benefit Claims assessing
Rider Benefit Claims processing
Distribution processing
BACS/CHAPS Processing
TT Processing
Debtor/Creditor monitoring and
chasing
General Ledger Accounting
General Ledger Maintenance
Offshore Controls
SEPA Processing
Multi Currency Payments
Client Payments
Balance Sheet Reconciliations
Receipting of payments
Bank Reconciliations
Cheque Reissues
Payroll Payment Processing
Month End Accounting
Infor10 Maintenance
Payslips
Quality controls
Product set servicing : Savings, Bonds, Protection, Pensions IFDS DSTO Core services
OM retained India Key:
43 Confidential
Service model flexibility – it’s not all or nothing Service model
Capable of serving insurance companies with technology and BPO solutions for wealth, heritage / traditional L&P and funds in an owner-operated, multi-tenanted/shared service environment
Alternatively, our clients have the flexibility to adjust their servicing model based on:
• business segment
• business function
• service channel
• product type or variant
• by customer or customer segment
• by distribution channel
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The Toolkit’s results are analyzed and mapped onto a prioritization matrix. The factors under consideration are: • The client’s need for offshoring • The operational ease of offshoring • The projected dollar value savings that might be gained from offshoring the process
Process Prioritization Matrix
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
0.00 0.20 0.40 0.60 0.80 1.00
0.77
0.77
0.77
0.75
0.66
0.56
0.48
0.48
0.52
0.40
0.42
0.38
0.30
0.25
0.22
Data analysis
Data preparation
Actuarial audit
Valuation
Model validation
Statutory reporting
Mortality and lapse analysis
Profit testing
Parameter estimation
Margins for adverse deviation
Transfer value calculation
Bonus earning capacity analysis
Surrender and Paid-up value calculation
Benefit illustration
Surplus analysis
Pricing and reserving
Individual capital assessment
Embedded value calculation
Product designing
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The predicted change in operations
0
50
100
150
200
250
300
350
400
Front Office
Middle & Back Office
Support Services
IT Run
IT Change
Assuming book size of 1 million policies
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From this
To This
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Finally - Comparison to the UK market
• Germany is ‘kicking the can’ and in crisis denial
• The industry is too slow to change and the crisis will be on them before there is a suitable reaction
• General fear of the BaFin rather than ‘partnership / embracing regulation’
• Restrictive environment
• Workers Unions
• Legacy protectionism / culture
• Immediacy of Policyholder rights
• Data protection
• Conflict of short-term ownership versus long term value
• Products
• Distanced from the clients
• Incredible product complexity ‘seen as unique…but not’
• Systems, processes ,data and control generally weak
48 Confidential
Thank you for your time
Questions ?
++44 7919 172577