When Save & Prosper (S&P), the London, UK-based life and pensions division of the JP Morgan Fleming Asset Management Group, closed itself to new business in 2001, it still needed to support and manage its existing portfolio of policies. With no in-house staff available to manage them, the company looked to outsourcing to manage 350,000 policies and to integrate 100 employees.
Explains James Broderick, head of UK Retail Business at the JP Morgan Group, “We were seeking to create a more flexible and dynamic business. S&P’s management team was determined to find an innovative third-party to whom it could outsource the management of its closed book of business.”
S&P looked for a partner with knowledge of the UK life and pensions markets. S&P chose Liberata, says Broderick, because of its client list and proven track record. It had also demonstrated the ability to deliver within a collaborative partnership framework, on time and in budget. S&P awarded Liberata a 10-year, £60 million contract in April 2001.
Liberata, a Buckinghamshire, UK-based BPO service provider manages over three million life and pension policies and 2,500 different policy types. “We provide a range of BPO services including policy and customer services administration, investment fund administration and unit pricing, actuarial support and valuations, and regulatory support services,” explains Mike Lusby, Liberata’s business development director.
As a result, Liberata became S&P’s preferred partner, which Lusby defines as a client and outsourcer having a working relationship to deliver services to S&P’s policyholders. This relationship involves regular meetings and a review of service level agreements for its process redesign, migration and transformation skills.
The Challenge of Supporting Closed Portfolios
Explains Lusby: “Because S&P was closed to new business, it was in the challenging position of managing a portfolio of policies that would decline over time and had a fixed cost base, which would typically result in redundancies.”
A closed book portfolio refers to the number of policies that decline over time as they mature or as a claim is made. This means that the insurance company would make staff redundant over this period, as there are fewer policies to administer. This situation was compounded by the fixed costs incurred by S&P, including buildings and mainframe computers that need maintaining and policy administration. Over time these costs increase, making policies unprofitable.
The solution, Lusby says, is to outsource the policy administration, which is charged on a cost-per-policy basis. This reduces cost as the number of policies decline. Moreover, the insurance company is better able to predict its future costs for managing its business.
Therefore, S&P needed a solution that mirrored its changing business, explains Lusby. This has particularly been the case in Europe, where the BPO market in the UK alone is expected to rise from £3.5 billion in 2003 to £10.3 billion in 2005, according to figures from Holway Ovum, a research service specializing in the UK software and IT services marketplace and headquartered in London, UK.
Collaborative Financial Engineering
After closing its life and pensions portfolio in 1998, S&P had to address specific issues such as how to apply the appropriate financial engineering to move from a fixed to a variable cost model, as well as how to maintain systems that were compliant with regulatory requirements, while at the same time managing and motivating staff.
Through the implementation of a transaction-based outsourcing agreement, Liberata has provided not only a reduced service cost of a declining portfolio but has also improved productivity and ensured greater management transparency.
According to John Mackie, a senior consultant at London-based research firm Morgan Chambers based in London, UK, outsourcing is growing because the market needs to reduce costs, gain greater control of costs and move from fixed to variable costs.
Moving fixed costs to variable costs allows a company to only pay for resources it uses. In a non-outsourced situation, assets, staff and other resources are a cost regardless of whether they are fully utilized or not. With variable costing, according to need, the client pays for actual usage of staff resource, assets, software etc, explains Mackie.
Reduced Costs and Delivering Benefits
In assisting S&P, Liberata’s migration team worked on a plan to transfer all policies and supporting systems from S&P’s mainframe systems to a suite of systems operated by Liberata. Within six months, Liberata had seamlessly overhauled S&P’s existing processes, and managed the first phase of migrating 100,000 policies. The second phase of 220,000 policies was implemented in April 2002, on time and within budget. Broderick says the result was a dramatic reduction in costs and the creation of a more manageable business with a “cooperative” feel. “Typically we would expect to reduce costs by around 20 percent to 30 percent,” he says.
According to Lusby, Liberata has provided S&P with a full outsourcing service on a cost-per-policy basis, which is lower than S&P’s administration costs. It has also removed fixed costs and the cost of redundancy through re-deploying staff onto other clients, which he says has enabled more accurate prediction of future costs and provided greater management control. “By leveraging technology and stressing the importance of process, Liberata has enabled S&P to become a sustainable, virtual company, with only five employees on the payroll,” he adds. S&P monitors service level agreements (SLAs) on a regular basis at a monthly operational review group. Lusby says Liberata takes corrective action if it did not meet service levels over a period of three months.
Looking forward, Lusby says he sees enormous growth in the life and pensions market and Liberata is currently experiencing unprecedented interest in its services.
According to Nelson Hall, the Berkshire UK-based, BPO research firm, the life and pensions BPO market is currently estimated at around £5bn, whereas five years ago this would have been less than £500m. “With mounting pressure on margins, we believe an increasing amount of companies in this sector will seriously consider outsourcing as a viable and cost-reductive solution,” says Mackie.
Lessons from the Outsourcing Journal:
- Implementing a transaction-based outsourcing agreement reduces costs for companies with declining business portfolios.
- Third-parties provide greater control and flexibility for companies looking to move from a fixed to variable cost model.
- BPO offers maintenance of systems that comply with regulatory requirements, as well as reducing the costs of redundancy through staff re-deployment.