Since the second life administration system was developed, a philosophical battle has been waged over the conversion approach to take: point in time or from inception. In the early days, it was an easier decision. The systems were relatively newer, the products were simpler, consisting mostly of term and whole life, and the transaction histories were stored in paper files and not on the policy master files. Systems only processed in one direction—forward. As a result, point-in-time conversions were more prevalent, with the focus on capturing current paid-to-dates, tax basis information, and dividend balances.
With the advent of more complex product features like universal life, equity and index-based funds, paid-up addition riders, no lapse guarantees, and annuity riders, administration systems needed to evolve. They needed to be able to process both forward and backward, track and store information for all financial transactions, maintain multiple cash value balances, and, in some cases, change the essence of the product based on premium history and values. When insurers converted these complex policies to newer systems and the age of the policies was not that old, they tended to use a from-inception approach.
This entailed capturing the specifics of the policies, including all coverage, riders, benefits, and insured information, and creating a set of transactions, from new business to current day, to be processed in the target system. When all the transactions have been completed, the policy values can be compared between the current and target systems; any discrepancies are handled by adjustments to the target system, either to code or transactions. A benefit of this approach is that all policies are validated against new business plan rules, which provides a secondary check against the target system rules. This approach worked well when the policy size was low and the age of the policies was five years or less.
Hybrid Approaches
Unfortunately, today, many insurers have retained their legacy systems for 40 years or more. That means that complex products issued in the 80s have aged over that time frame, making it impractical to utilize a from-inception strategy. Running 40 years’ worth of financial transactions for hundreds of thousands of policies and reconciling the differences between current and target systems becomes almost impossible to do. To accommodate this, many insurers have adopted a hybrid approach between point in time and from inception.
This approach entails processing the policies through a separate new business environment that tweaks the product rules to allow backdated policies. Then, special conversion transactions are processed to set values and processing dates for each policy to a point in time 12-24 months in the past. All transactions that occurred after that point in time are then processed in the target system. The results are reconciled against current policy information, and any discrepancies are handled in the new system via adjustments. Any transactions that needed to be reversed or reprocessed prior to the 12-24-month time frame will need to be handled manually.
This approach works well for clean case policies where there were no changes to code or product rules to address defects over time as well as no issues where transaction data integrity had been compromised. Usually most of the policies are in balance and process cleanly. However, there are situations where specific product blocks are known to be problematic.
The Third Strategy
Some products can be complex, with Day 2 functionality that was never implemented or have issues that were addressed via hardcoding. In some cases, these policies can never be balanced and are converted over to the new system in a suspended state—they require manual processing support going forward.
To address this situation, a third conversion strategy may be needed: don’t convert. In these cases, it is best to let sleeping dogs lie and look at outsourcing the IT support and/or business processing for these policies. By utilizing this approach for a subset of the in-force policies, insurers can reduce the technical debt that exists in their operating environments, establish a fixed per-policy price and service levels, and transfer the responsibility of long-term support to a provider with experience maintaining old blocks. Many vendors are providing these services for their older legacy systems and have the experience and procedures in place to effectively manage these blocks going forward.
There are many options for conversions from legacy systems to a new platform as part of a transformation program. Insurers should look into performing a block analysis of their existing closed blocks. An effective block analysis offers insights into how a transition will affect different products and lines of business, creates a broad understanding of costs and benefits, and provides a framework for developing a conversion strategy.
For more information on block analysis, read Novarica’s report, Block Analysis and Life Systems Transformation.
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