Insurers are aware that their legacy products are becoming an increasing cost burden relative to the value they provide to the insurance company and the customer as the book shrinks, according to a report released by global professional services firm Deloitte.
In the report titled “Africa Insurance Outlook 2024/2025”, Mr Yura Kaliazin, senior associate director at Actuarial & Insurance Solutions (AIS) Deloitte Africa, says that the cost burden is not limited to administering the products, but extends to all the insurer’s operations.
Many South African insurers have accumulated a significant number of legacy product lines sold over the last 30 to 40 years. These products are normally closed to new business, have outdated product design and features. They are also often administered on older systems and come with associated key person risk, with fewer people within the company still understanding the product designs and features.
Hence, the products demand an increasingly disproportionate amount of time, effort, systems capabilities, and costs in order to meet customer promises. In certain cases, similar observations can be made regarding historic reinsurance arrangements, which often are attached to such legacy products.
Mr Kaliazin said, “In addition, our local and global experience shows that maintaining such complexity within a life insurance product portfolio impacts future strategic projects, such as systems migration and finance or actuarial process transformations.”
They also increase insurers’ customer conduct risk — regulators are increasingly focussing on ensuring the policyholders are getting fair outcomes. For example, in the UK, the Financial Conduct Authority (FCA) now requires all legacy products to comply with the latest conduct requirements, irrespective of how long ago such products were designed and sold.
Rationalisation
However, a proper exercise to rationalise legacy products is not a trivial undertaking. Older legacy products often have relatively healthy profit margins that insurers are unwilling to give up. Newer, more competitively priced product designs, sold in more competitive current markets, may not be able to match the profit margins.
Another complexity relates to proving that policyholder promises that were made years ago when such legacy books were sold would still be met by new product designs.
Practically, a streamlining exercise can take many forms. For example, an insurer can combine different investment portfolios on different investment products, collapse smaller bonus series into larger ones, replace older products with an appropriate blend of new generation products, or pay out customers their policy values if no suitable product replacements can be found.
Without a planned endpoint, it is difficult to decide which form of rationalisation to follow (e.g., system merge, product merge, etc.) and how to deal with practical issues. To ensure that everyone tackles the problem from a common point of view, it is essential to get buy-in from key stakeholders involved in the process (higher management, product teams, distribution networks, systems teams, actuarial and finance teams, etc.).
What is to be done?
Firstly, it is imperative to offer clients, at appropriate terms, opportunities to meet their evolving insurance and savings needs through up-to-date products.
Secondly, companies can increase efficiencies by consolidating product lines into newer and more modern versions.