The very nature of life company products, balance sheet usage, the mathematic and reporting complexities and associated tax implications, clearly distinguish them from the mutual fund industry as providers of investment products. More recently, margin pressures and regulatory change have been altering the way life companies do business and the products and services they offer. This article looks at the developments in the industry and how operational and technological requirements are changing to keep pace.
The complexities of the life business become clear when you consider actuaries’ attempts to estimate the future scale of liabilities and commitments based on uncertain events. Models are created that analyse current and future demographics, incorporate a huge variety of population statistics and potential healthcare outcomes, calculate likely payouts and then match that against the fund’s investment profile. It’s a task that has occupied some of the finest mathematical brains in the financial sector and, not surprisingly, many life firms have preferred to rely on their trusted in-house capabilities than search around for external providers.
On the asset side of the business, life companies have made use of complex unit-linked or ‘inter-funded’ investment structures to allow the use of large investment pools, known as general account or statutory funds, to service the needs of a wide range of investor and policyholder profiles, products and distribution channels efficiently.
Then there are the difficulties of managing both taxable and non-taxable transactions and dealing with fair apportionment of tax liabilities to products in accordance with product profiles and the company’s taxation requirements. And of course, life companies can also manage their portfolios from the perspective of an aggregated balance sheet, allowing them to manage their tax position and pass on some of that benefit to the end investor.
These challenges mark life companies out as different and as a result it has been hard for non-specialist technology providers to support them in these specific areas. But internal and external pressures have meant that things are changing and life companies are looking again at their operational and technology set-up to ensure success in this new and more fluid environment.
The changing nature of the life business
The pure life business now is very mature, and we are seeing a degree of diversification in products offered, particularly in the investment space. At the same time, life companies are having to be more innovative with their offerings. Apart from the challenges that life companies face competing with mutual funds on the assets they can invest in, they have the additional ability to compete leveraging the balance sheet basis of their offering. This allows them to add value through being able to take positions and risk on their balance sheet to give their investors a better deal.
As they diversify from traditional life insurance and endowment products, life companies have tended to open up their investment function to involve external managers to enhance returns. Similarly, the asset management arms of life companies have looked to extend their remit to include managing external funds or mandates for third parties. In the UK, as an example, it would not be unusual to see a life company’s funds representing only 50 to 70 percent of the associated asset manager’s assets under management.
Conversely life companies may establish investment platforms to distribute products from unrelated investment managers alongside their own, bringing with it the new requirements to ‘manage’ these external managers in areas such as processing fees and rebates. Life companies also need to service a range of different distribution channels including tied or independent investment advisors or financial planners (employee benefits consultants).
Life companies are becoming more adept at bringing new products and services on line: whereas ten years ago the product range was fairly static, there is now a greater level of product innovation targeting and competing for customers at various stages in their financial lives. Having said that, life companies are still in the long-term business of serving and protecting clients from both investment and risk management perspectives.
All this is happening alongside an abundance of merger activity within the sector which creates even more complexity. With different life companies needing to be administered through the intricate process of restructuring to achieve integration and resultant efficiency gains, there is an additional imperative for firms to source technology that is flexible enough to allow them to go on the acquisition trail.
However, as life companies move towards a more general investment model they face greater pressure for transparency and consistency throughout their product and investment pool structures, since the same underlying investment management function can now service both life and investment products.