As the baby boomers retire and the annuity business continues to grow, the importance of a modern, flexible annuity platform becomes more and more evident for insurers.
Annuity purchasers have many more choices today and insurers must be able to provide competitive products, carefully tailored, in terms of underwriting and pricing, to the needs of individual buyers. In addition, new regulatory requirements call for insurers to change the way that annuities are administered.
Unfortunately, many insurers find themselves trying to support their portfolio of annuity offerings with outdated legacy software capabilities. Existing systems, often reflecting previous mergers and acquisitions, can be inflexible and unresponsive to the needs of the business. These legacy platforms can be expensive to maintain. And, because adding new products or changing existing products requires new coding, the company may find it hard to bring new offerings to market quickly. Many older, in-house systems cannot scale to the needed level and manage high volumes of business efficiently and accurately.
Insurers seeking to create a modern annuity system do have the option of total replacement. In general, IT budget restraints prevent all but a few companies from pursuing this approach. Another path is called “fronting:” leveraging a leading insurance software platform to provide a new, updated user interface layer for the legacy systems.
A third approach is a hybrid of the two: replacing one or more critical systems immediately while leveraging the fronting capabilities for the others; and pursuing a phased approach over several years to migrate all systems to a modern platform.
Modernizing the annuity system, whichever path is chosen, can pay big dividends. Modernization can enable insurers to increase speed to market, improve operating efficiency and drive down costs. Better products can be developed, with more effective customer service, and compliance-related process changes can be made more efficiently.
A modern annuity platform should be able to support multiple product lines or capabilities, especially in these key areas:
(1) Variable annuities. For the last 15 years, variable annuity products have included guaranteed living benefits as a rider. A modern annuity platform, therefore, must support these riders, which can be extremely complex, requiring calculation of dozens of values and the display of many of these values for display in policy quoting. An advanced software platform can give insurers the ability to adapt more effectively to this complexity by enabling business users to make configuration changes rapidly, rather than waiting for IT to generate new code. (2) Fixed annuities. Fixed annuities include two major product categories. The first is a general fixed product, which often offers better interest rates than a money market or savings account. Another product category is the equity-indexed annuity, which ties performance to a major stock index. For these products, a modern annuity system needs to be able to perform the market value adjustments that enable insurers to pass interest rate risk on to customers, rather than absorbing it themselves.
(3) Payouts. As baby boomers have approached retirement, the expectation has been that payouts would grow substantially. For a variety of reasons, however — including economic uncertainty and the fact that many people are working past traditional retirement age — people are not converting their deferred annuities into payout annuities at the expected rate. As a result, payout products are now more complex than they were 10 to 15 years ago. Older systems did little more than pay checks, but today an annuity system must be able to make payouts more liquid and provide flexibility, since some customers have had 20 to 30 years of flexibility on the deferred side.
(4) Configuration and testing. Another essential feature of a modern annuity system is that it should be significantly configurable from a product, business and process perspective. In recent years, configurability has been the principal driver of the reduced effort required to make product changes. More advanced software platforms for the life insurance and annuity industry go beyond configurability by offering prebuilt or “out of the box” templates for product and business configuration.
These default products come with documentation and test cases for new carriers to leverage during initial implementation, as well as simplified data structures, which can improve data access and simplify integration with other systems. The software should also offer effective testing capabilities because, even with advanced configurability, testing is still an essential part of the overall process.
A modern annuity system can help insurers control costs through configuration and pre-defined templates that enable process changes to be made more quickly. Pricing can be done more effectively through better analysis of risk. And, perhaps most important, insurers can speed new products to market and help make faster changes to existing products. As annuities continue growing, these benefits can help insurers establish and maintain important competitive advantages in this key product area.