Exploration of Closed-Book Portfolios in Individual Life Insurance

Closed-Book Life Insurance
An investigation into service provision, outsourcing, and information disclosure 20 June 2023

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Many life insurers possess so-called 'closed-book' portfolios. These are insurance policies that are no longer sold but continue to run for existing customers for many years. In the past, insurers offered various (individual) life insurance products on a large scale, for example, for mortgage repayment or as a supplement to pensions. Due to the long-term low interest rates and the expiration of fiscal benefits, these products have become less attractive for both insurers and customers. Furthermore, the 'woekerpolis' affair means that investment insurance is hardly being sold anymore.

Because the portfolios are shrinking, life insurers are under pressure to keep the costs of managing these closed-book portfolios manageable. A large number of life insurance policies taken out in the past are still running today. Insurers remain responsible for their duty of care towards their customers, while the systems are often outdated and expensive to maintain. As the number of life insurance policies in the portfolio decreases, the management costs per policy increase.

Insurers will need to absorb the rising costs and can do so by turning various knobs. Options include selling the portfolio, outsourcing work, or conversely, acquiring portfolios. In this way, insurers can achieve synergy advantages. However, there is also a risk that insurers (also) simplify service provision to limit costs. Customers may then, for example, find it more difficult to contact the insurer or may no longer be able to make certain changes to the life insurance policy. The shrinkage of the life insurance market could thus lead to customer interests no longer being, or insufficiently being, central in the service provided to customers with a life insurance policy in a closed-book portfolio.

The AFM therefore conducted an exploration in 2022 into the service provision and outsourcing regarding closed-book portfolios of individual life insurance. It also looked at the information provided to customers. For the research, the AFM first issued a request regarding the outsourcing of work in the context of closed-book portfolios. Additionally, the AFM requested information from life insurers via interviews regarding their strategy and fulfillment of the duty of care. The interviews discussed, among other things, outsourcing, aspects related to customer contact, information provision to customers, and product development standards.

The exploration shows that all insurers investigated have drawn up a strategy on how to deal with their closed-book portfolio. Insurers confirm that the costs of managing a closed-book portfolio are related to its size. The smaller the portfolio, the fewer policies there are to spread the costs over. According to insurers, it is therefore important to reduce fixed costs. Some insurers therefore choose to outsource the management of the portfolio or sell it. Other insurers are specifically looking for scale advantages by acquiring portfolios.

Regarding service provision and information disclosure to customers, there do not appear to be any acute risks at this moment. For example, customers can still reach insurers through various channels to, for instance, execute mutations. Additionally, insurers pay attention to the (continuous) improvement of information disclosure to some extent. In doing so, insurers sometimes use consumer panels or consumer research. According to their own statements, information disclosure has also improved further following earlier published guidelines1 by the AFM. 1 Disappointing final capital requires intensive contact between insurers and customers (afm.nl)

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Furthermore, most life insurance policies, even if they are no longer sold, are periodically evaluated based on product development standards.

Regarding outsourcing, it appears that insurers set various requirements for the executing party concerning service provision to customers, IT systems, and data security.2 Insurers are increasingly outsourcing the management of closed-book portfolios to third parties to achieve cost advantages. In this process, insurers also pay attention to customer interests during migrations of internal and external portfolios. Policies that are converted are not changed to the detriment of customers.

To keep the costs of service provision to customers manageable, insurers see a number of focal points:

• The migration of policies to new IT systems is necessary. The old systems require specific knowledge, which is slowly disappearing with the departure of employees. Additionally, the underlying technology is outdated in some cases. Moreover, the systems are too expensive to keep running. It is cheaper to bring all policies under a small number of new systems. Any changes then only need to be implemented in a limited number of systems, meaning less personnel is needed to manage the systems. All life insurers state that they are (going to) undergo this development, or have already undergone it.
• Simplifying and making service provision cost-efficient. For example, they offer customers the possibility to execute many mutations themselves via an online portal. At the same time, insurers state that they remain reachable by telephone, given the diversity of customers and their needs.

The AFM sees room for improvement in the relationship between insurers and authorized agents. Insurers can take more account in their risk management of the outsourced activities to agents to better assess execution and ensure compliance with laws and regulations. Some insurers state that there are no recent risk analyses available for ongoing power of attorney relationships. Although agreements have been concluded, these are mostly old or taken over from other parties, without risk analyses having been performed. Outsourcing to the power of attorney channel is a far-reaching outsourcing, and risk management can ensure that measures are still appropriate.

The market is expected to continue shrinking in the coming years, increasing the risk of simplifying service provision to the detriment of customers. On average, closed-book portfolios shrink by six percent per year, and as a result, costs per policy continue to rise.

The AFM will closely monitor the aforementioned market developments to ensure that customer interests remain central even in closed-book portfolios. Insurers must indeed continue to strive for cost efficiency. Because the size of the portfolio and other quantitative indicators only give a first impression, the AFM will combine these figures with a qualitative approach, including periodic conversations with life insurers about their strategy. With this monitoring, the AFM will also strongly advocate in the coming years for a life insurance sector where insurers continue to prioritize service provision to customers. 2 DNB has issued recommendations in its Good Practice Outsourcing Insurers for all aspects of outsourcing.

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