Moving From Vertical

Creating Breakthrough
Value in Life Insurance
To Virtual Integration
Creating Breakthrough Value in Life Insurance
:
a . r. x i a i xi \
ax i xnusrns uxnrn si ror
No wonder the life insurance industry is under siege (see figure 1). Deregulation has opened the flood-
gates to new entrants including banks and investment firms. Demutualization is forcing performance
improvements in an effort to meet the expectations of cautious investors. The Internet has transformed
the industry by offering new channels, new opportunities to leverage customer information and new
ways to deliver on consumers growing expectations of customer service. (Despite this pressure to offer
strong Internet capabilities, insurers must be frugal with their e-business expenditures.) Estate tax
reform is promising to hamper sales of certain tax-advantaged insurance products, while the fickle
stock market is continuing to do its best to dissuade investors and destabilize investment income.
Looking ahead, insurers can count on asset retention and management challenges as aging baby
boomers stop accumulating wealth and instead aspire to longer periods of retirement and asset
distributionultimately transferring their wealth to a new, more sophisticated and service-conscience
generation of investors.
Beyond the external forces, an assortment of internal dynamics is eroding life insurers ability to
increase profitability. Pure management of insurance risk, for example, prevents insurers from differ-
entiating and earning large profits. Hefty amounts of capital and resources tied up in servicing old,
in-force blocks of business is preventing large insurers from moving into new markets, creating new
products and streamlining expenses. It is often these aging servicing and technology environments
that thwart insurers attempts to offer more innovative (and more profitable) products. Similarly,
insurers are unable to use their superior investment skills to increase profits due to constraints by
regulators both in the amount of reserves to be held and in the nature of investments made. And with
more sophisticated customers purchasing new types of products preferring annuity products to
whole life policiesas well as demands for 24/7 customer service, insurers are left with even fewer
opportunities to boost margins.
The result? Over the past five years, the performance of public life insurers has lagged signifi-
cantly behind other financial service sectors, and the gap is widening. In a recent study comparing life
Introduction
Market pressures faced by major players in the insurance industry call into question the viability of
the traditional vertically integrated approach to the life insurance business. Customers and capital
markets no longer value many of the traditional functions that insurance companies perform and
are looking for increased return from the remaining activities. Successfully addressing these pressures
requires a new vision and a bold approachin essence, a disaggregation of the existing business
model and a fundamental refocusing on the core components of the business. The linchpin of this
effort is the transformation of mundane processing and servicing functions into new strategic
capabilities. Together, these capabilities are the catalyst to unlocking value in the industry.
Creating Breakthrough Value in Life Insurance
a . r. x i a i xi \
:
insurers to all others (including the S&P 500, diversified financials and the financial sector), the returns
of life insurers have risen only slightly while the returns of others are as much as five times higher than
the original investment. In fact, the economic returns of life insurance companies would have to
increase by almost five percentage points to match the average performance of leading financial
services institutions.
Some analysts assert that a wave of consolidation is the only way to close the earnings gap in the
insurance industryciting as proof the more than 175 life and health insurance deals valued at
more than US$80 billion that have been signed since 1998. This includes the purchase of American
General by AIG. In fact, many analysts believe that intra-industry consolidation will accelerate as
global players with global brands, technology and distribution resources gain economies of scale
and build sustainable customer franchises. Other analysts, including those at ING and Citibank,
support another viewpoint, saying that it is only a matter of time before life insurers become divisions
of much larger financial-services firms.
Which of these competing groups of analysts is right? They are both right. The reality is that the
two trends will persist concurrently in the coming years.
In this paper, we offer insurance executives a way to capture a competitive advantage during this
period of change. Our remedy resides in A.T. Kearneys virtual integration strategya proprietary
approach to reworking the business model that helps life insurers bridge performance gaps by focusing
on core, value-creating activities. Central to the strategy is an unbundling of the existing business
model that allows an insurer to focus on specific activities that will generate the highest possible
value for the company. In essence, what we propose for the insurance industry is a movement from
vertical integration to virtual integration.
uxioci xo vaiur i x rnr i xsunaxcr nusi xrss xonri
Virtual integration is an emerging approach to business system transformation and optimization. By its
simplest definition, virtual integration is the unbundling of the insurance industrys existing business
model enabling an insurer to individually manage specific activities that will generate the highest
possible value for the company.
Briefly, instead of thinking of insurance as a single business, in a virtually integrated company
insurance becomes three unique businesses: processing and servicing (operations), product creation
(design and underwriting) and sales (distribution). Whether the company is actually broken up
into three distinct entities, or a major function is outsourced, the aim is to think of the company as
a portfolio of distinct businesses in which each component is focused on value creation (see figure 2).
Clearly, this trend of individually managingand thus unbundlingthe value chain is fairly
well developed. The financial services industry, especially the mortgage and credit card sectors, is
well versed in the concept (see sidebar: Unbundling the Value Chain). Players in these sectors have
demonstrated how quickly this concept can be adopted and integrated, as well as how profitable the
processing and servicing business can be.
Creating Breakthrough Value in Life Insurance
a . r. x i a i xi \
,
Nonetheless, life insurers have been hesitant to fully embrace the concept due, in part, to the unique
nature of their business and to significant, inherent barriers to change. For example, the complexity of
products and slowing industry growth have led to a dependence on expensive face-to-face producers
such as agents and brokers. The insurance industry also suffers from a lack of homogeneity and data
standards for sharing information as well as a vast number of proprietary, inflexible IT systems
(a wide range of systems can exist within a single institution). Furthermore industry governance
under a mutual structure has delayed both innovation and decision-making.
These challenges, coupled with policies that stay on the books for decades, have prevented the
insurance industry from taking advantage of the significant economic benefits that can be derived
from virtual integration.
Until now.
srnarroi c ovri oxs ro cnrarr vaiur
Today, several A.T. Kearney clients are exploring virtual integration strategies. Our work focuses
primarily on evaluating ways to unbundle traditional functions and create new businesses with
a basis for long-term competitive advantage. In our experience, processing and servicingtraditionally
viewed and managed as an unfortunate cost black holeis the key anchor of this transformation
approach (see sidebar on page 11: A Shift in Focus). Indeed, based on our own estimates, the impact of
outsourcing just the processing of in-force policies can be impressive. For example, in analyzing the
impact such a move would have on the 10 largest individual life insurance providers, our estimates
reveal the potential for an average increase in market capitalization in the range of 2 to 6 percent.
Consequently, while value increases in the sales and product-creation areas, the real breakthrough from
virtual integration comes from transforming the processing and servicing area into a value generator.
Of course, the ideal configuration of a virtual organizationand the role of processing and
servicingwill differ according to an insurers size, focus and core competencies. For example,
a regional insurer may decide to outsource its policy servicing and processing in an effort to focus
on specific product and segment niches. By comparison, an international diversified financial services
company would likely partner with a third-party administrator (TPA) to create an enterprisewide
process and servicing shared-services utility, which would free the business segments to focus on
their core operations. Finally, a large traditional insurer might decide to partner with a TPA to
create an industry-wide utility to process and service policies. This move would not only create new
revenue sources but also allow the company to redeploy resources to pursue alternative distribution
models for its products. The result is a virtually integrated insurance company with processing and
service, sales and distribution, and product creation and underwriting utilities that can be owned
and managed solely by the insurer or with a strategic partner.
Essentially, this discussion is about addressing processing and servicing capabilities to create new
strategic options for insurers. It begins with variations on two themes: fix the old and create
the new.
Creating Breakthrough Value in Life Insurance
a . r. x i a i xi \

Fix the old

For years, servicing of in-force books of business has placed a significant burden on insurance organi-
zations. (Many of the giants are supporting millions of old policies at a time.) The overall enterprise
operations and systems platforms are complex, costly and often inflexible, which means these
companies are not in a position to accommodate the upgrades and innovations that will be required
to support a competitive marketplace. Indeed, it is estimated that insurers spend 60 to 70 percent
of their general expense costs supporting these blocks of business. This represents significant capital
and resources that could be focused on developing new products and courting new customers.
True virtual integration, therefore, calls for releasing the company from the constraints of an
infrastructure dedicated to supporting individual life in-force policies (see figure 3). This is accomplished
by forming a strategic partnership with a third party partner to create a new businessone that takes
responsibility for servicing this book of business and can reinsure liabilities to free up capital.
Clearly, the growth of a new wave of TPAs provides insurers with this option, enabling them to
drive down operational costs by leveraging the scale economies and capabilities of the TPA. In fact,
a good number of insurance companies have already built alliances with third parties to handle some
or all of their processing and servicing. Fidelity & Guaranty Life, for example, outsourced a number
of key business processes to CSC, including new business applications, underwriting, policy services,
claims processing and customer service. Chubb exited life insurance altogether and sold off two million
policies to Swiss Re, which turned the business over to third-party administrator Cybertek, which is
now residing under the CSC umbrella. IBM is offering externally hosted claims handling and
processing services for the P&C industry.
A more recent example is Lincoln National. Lincoln, the third-largest seller of variable annuities
and seventh in life insurance sales, contracted with EDS to administer its entire business function,
which accounts for 90 percent of its traditional whole life and term policies. EDS is performing all
ongoing business functions for the life insurer including in-force processing, customer service,
premium billing and reporting. EDS will also provide Lincoln with the IT services to support these
business functions.
The benefits of exiting the in-force business are as follows (see figure 4):
Immediate capital relief and improved efficiency
Consider that a typical large insurer spends close to 40 percent of its costs on processing and servicing.
Once this function is restructured the insurer reduces its operating expenses, often on the order of 25
percent, and could potentially increase its market capitalization from 2 to 5 percent. Furthermore,
a portion of the insurers liability costs can be fixed or transferred to a reinsurance partner, which
reduces ongoing capital requirements and provides surplus relief.
Predictable cost structure for in-force policy servicing
Transitioning the in-force business helps to stabilize controllable operating costs (especially for
Creating Breakthrough Value in Life Insurance
a . r. x i a i xi \
,
insurers that must re-invest to maintain older systems) through guaranteed cost controls over a five- to
ten-year period.
Resources redeployed to support new, higher margin initiatives
The qualitative benefits of such a plan are equally compelling. Companies that exit the in-force business
are no longer bogged down in the day-to-day minutia of administering policies. Management is free to
focus on core capabilities and new business development. Technology resources can be redeployed to
support CRM and e-business initiatives. All things considered, pursuing new business initiatives, which
is the logical next step in attaining future advantage, will call for time-consuming tasks such as deciding
which strategic partnerships can help the company reposition for future success.
Sends a strong profit and growth signal
The movement away from old books of business and redeployment of resources sends a strong
growth and profitability message to the marketplace and capital markets. This creates
a unique competitive advantage that can help support acquisition activity in the future.
Possibility for release of capital through securitization or reinsurance
Whatever profitability is built into the in-force business could conceivably be captured by transferring
capital requirements and management responsibilities to a capital deployment partner. Companies
such as GE Capital, Swiss Re or Lincoln Re could essentially reinsure or buy an insurers in-force
business. This is attractive to insurance providers because it allows them to exit the in-force business
immediately while obtaining needed capital for any new business initiatives on the horizon. In many
ways, it is akin to securitization of banking receivables and makes just as much economic sense given
the large number of old policies that the major insurance providers are handling. Through reinsurance,
insurers are able to fix a portion of their liability costs and reduce ongoing capital requirements. Also,
they can release capital and achieve RBC relief.
Capture and use of customer data
The insurer is able to more accurately capture and access customer data and potentially enable its
use in pursuing cross-selling strategies. The TPA guarantees the highest possible service standards
with the insurer continuing to control all critical customer information.
Importantly, from the customers standpoint, there is no difference. The company still looks like
their old insurance provider. And while customers continue to see the same corporate face behind
the words on the computer screen, or the person working the phones at the call center hotline,
processing and support is, in fact, being performed at the utility level.
The longer-term opportunity is for the insurer to partner with others to help solve the in-force
business problem. In many cases, it may make sense for the insurer to continue to retain part
ownership of the business and sell these processing services to other carriers. This new super-TPA
Creating Breakthrough Value in Life Insurance
a . r. x i a i xi \
o
could provide the scale to handle the insurers own books as well as the books of business of other
insurers that is, only if the insurer has chosen solid alliance partners with excellent service levels,
a good cost structure and scale. The right TPA partner should actually improve quality because the
business function is a core competency. And, in the long run, those costly and complex infrastructure
reinvestments which will undoubtedly be necessary to compete in the new economywill be
borne by the TPA. A rosy picture indeed, but one of the challenges in exiting the processing and
servicing business is finding a partner with sufficient scale to take on a sizeable closed-book operation.
The insurer must be confident that the TPA will both stand behind its work and make good on its
commitment to ensure service levels.
As this trend gains steam, A.T. Kearney estimates that the in-force TPA market could reach
several billion dollars annually. And it is likely that a combination of large-scale technology and
process outsourcers such as EDS, IBM and CSCwith selected insurance partners will capture
most of this market.
Create the new
Today, the battle for revenue growth and for profitability in the insurance industry is focused
squarely on new product development with a goal of capturing and retaining new customers.
Through virtual integration, insurers disaggregate all product-related infrastructures from their
organizations moving products either to an internal unit or to an external third party. Essentially,
the insurer creates what we call a greenfield utility to design, issue and service new business. This
utility allows the insurer to dramatically reduce time-to-market, improve customer service and simplify
operating effectiveness and efficiency. The new business utility is able to support future growth and
to offer third-party services to other insurers to realize nontraditional revenue streams.
The following provides a closer look at the attributes of a processing and servicing utility.
Preissue
In preissue processing and servicing, the insurer builds an integrated channel for processing, under-
writing and issuing policies to the customer. Partners, such as credit bureaus and medical information
companies, are all linked to the insurer via technologies such as the Internet. For example, suppose an
applicant for life insurance needs a blood study performed as part of the underwriting requirement.
The blood sample can be sent to a lab for processing and the results can be transmitted electronically
to the insurer. Such technology-enabling automation can shave weeks off the application process and
increase cost savings anywhere from 10 to 20 percent.
Consider the other types of value that can be generated. By blending originating and under-
writing, the insurer eliminates duplicate steps. And by automating the process there is a significant
increase in efficiencytrading the hard-copy paper trail for an electronic trail. Lead times shrink,
service levels increase and, importantly, the company is able to compete more effectively in a market
where customer expectations for service and timely transactions are on the rise.
Creating Breaktrough Value in Life Insurance
a . r. x i a i xi \
;
Post-issue
In post-issue processing and servicing, the old servicing infrastructure is replaced with a utility that
is built on new technology and web-based alliances and partnerships. By using XML and Internet
formats, an insurers third-party alliance partners become members of a digital value network.
Service departments, billing specialists and technology providers, among others, communicate with
the insurer and each other in real time and all have access to the same information.
The utility also communicates with its customers: Agents use their laptops to send email, and
branch offices and learning centers are set up with the customer in mind. In effect, the lines of
communication are wide open. It no longer matters whether the partner is in the next office, the
next town or the next statethey are simply a keystroke away from the insurer and its customers.
The benefits in customer service are impressive. Through web alliances, insurers are able to move
from mass marketing tactics to personalized service. Consider, for example, an insurer that offers
online advice-based financial products. The customer who takes a minute to complete a financial
profile receives a personalized financial plan that includes products from multiple providers. No
matter what channel the company uses, customers are able to participate in highly personalized
interactions. Further, the Internet can be used to support revenue-generating e-commerce projects
and business efficiency, which have implications for the larger enterprise. Websites will evolve into sales
channels used to support traditional sales. The company can introduce self-service options, allowing
customers to go online to perform a wide range of functionsfrom locating an agent and reporting
a claim to renewing a contract. And there is a dramatic reduction in employees manning 24-hour call
centers when customers log onto websites to find answers to the most frequently asked questions.
Clearly, there are costs for such an ambitious undertakingwhich alone argues for constructing
a processing and service utility via a partnership between insurers and technology providers. It will
require a major upfront investment in time, resources and capital. Initially, it may cause a disruption
in the day-to-day business, and key stakeholders may balk at the changes. But the long-term gains
are well worth the short-term costs.
nrixvioonarixo vaiur acnoss rnr rxrrnvnisr
Once a processing and servicing utility is established and generating economic value, the insurer can
focus again on the sales and product-creation portions of the value chain. The following describes
how additional virtual integration strategies are likely to develop.
Selling and distribution
Growth and innovation are the keys to survival for the financial services industry, and historically
many insurers find themselves behind the eight ball in this regard. However, one area of potential
advantage for insurers is in the area of sales and distribution. In the United States alone, the target
market for insurance is approximately 38 million people. An estimated 11 million people in this
Creating Breakthrough Value in Life Insurance
a . r. x i a i xi \

group want insurance or increased coverage terms but have limited or no access to sales and distribution
(agents, for example). This represents an overall market opportunity estimated to be several billions
in premiums.
To tap into this market, many insurers are pursuing a variety of different product and channel
strategies. Most have created online distribution offerings to match all types of customer needs and
to provide high quality, reliable and personable customer service. Insurance companies are aligning
with independent brokers, employers, banks and, of course, using the Internet as a distribution
channel. The key challenge is to become the easiest to do business with. To do so, requires an open,
effective and integrated processing and servicing capabilityeither owned or through a partner.
Without such a capability, all the investments in distribution are nothing more than facades on
a movie set they look nice from the outside but who would want to live there?
Underwriting and product creation
Suppose an insurance providers core competence is design and underwriting. To bolster creativity
and innovation, the company decides to diversify and is now creating products for other companies,
even private labeling its own products, and devising new products to address the needs of the
upcoming retirement bubble to manage distribution of assets in the golden years.
Now that U.S. regulatory conditions have legalized convergence, insurance companies are free
to sell their product to banks that are looking to enter the insurance business. Few banks have
endeavored to go it alone, however. Instead, banks and insurers are creating partnerships at an
unprecedented rate, and bancassurance has become an accepted part of the financial services spectrum.
A survey by the Association of Banks-In-Insurance estimates that 22 percent of banks are selling
group life and health insurance, and another 23 percent plan to do so within two years. Yet, while
banks are keen on enhancing their role as insurance distributors they are in no hurry to assume
underwriting risk, choosing instead to form alliances with insurers. In fact, only 7 percent of banks
say they are likely or very likely to assume underwriting risk within the next three years and, as
an alternative, plan to form alliances with insurance agencies and insurance carriers. An insurance
company with the wherewithal to produce a specific product can offer it to all types of financial
services companies to sell under their own labels.
In the future, product profitability will rest on an insurers ability to design products that will
not only sell but also be efficiently underwritten and servicednecessitating a processing and servicing
capability that supports product innovation. Insurers that focus on underwriting and product creation
have an opportunity to broaden their role: providing customers with greater financial security as their
needs progress from asset protection to asset accumulation and ultimately to asset distribution.
acnirvixo rnr vnoxisr
Critical to the success of virtual integration is leadership that emanates from the top of the organization.
The changes that are required are fundamental, and the level of partnerships forged requires strong
Creating Breakthrough Value in Life Insurance
a . r. x i a i xi \
Conclusion
The insurance landscape has forever changed. Virtual integration represents a bold approach for life
insurance companies that compete in the new environment to work outside the industry to transform
traditional servicing and processing functions to create new sources of advantage. By disaggregating
the existing business model and focusing on core, value-creating functions, players in the insurance
industry can achieve:
Improved efficiency
A predictable cost structure
New initiatives pursued through redeployment of resources
A strong profit and growth message
Improved capture and use of customer data
Potential long-term capital relief
,
direction and organizational commitment. Before embarking on virtual integration, the insurer
must know that its management team is comitted to change.
In addition, virtual integration requires a sound structuring of cross- and intra-industry strategic
partnerships. Insurers must focus on selecting partners with care and building new business
structures with creativity. Each strategic partnership should begin by defining common goals and
objectives, and formulating a way to measure progress against the goals. It is also critical to have
a comprehensive view of the value creationparticularly in terms of cost transparency and value
sharing. The economic attractiveness of the alliance will rest on the insurers cost structure and the
opportunities for cost displacement. Therefore, before making any decisions with long-term implica-
tions, it is important to consider all costs that will be incurredincluding conversion costs and the
cost of an internal restructuringand then determine how best to share the displaced operating costs
with a partner.
Also, all partnerships must be based on a good cultural fit. This is particularly important when
alliance partners make up what was previously a core part of the insurers organization.
Finally, insurers will need to make a commitment to fundamentally changing and
challenging their business. This involves a careful consideration of the potential risks that surround
the organizational changes and the strategic implications of new approaches and relationships. For
example, the following questions should be answered: Is it possible to disengage from the alliance
if the relationship sours? Are there switching costs? Are there barriers to exit? Will business be
disrupted if the relationship ends? What are the financial and strategic risks of an unsuccessful
operating model? Answering these questions and persevering through transformation challenges
will separate winners from the rest of industry.
Creating Breakthrough Value in Life Insurance
a . r. x i a i xi \
: c
Unbundling the Value Chain
Virtual integration is not a new concept. Years ago, the financial services industry reacted to many of the same mar-
ket pressures that are now hammering the insurance industry in much the same way. Financial services organizations
began by using their technological know-how to improve simple transactions, which eventually led to an industry trans-
formation.
The mortgage industry epitomizes the unbundling concept. More than a decade ago, pressure from shareholders
for higher financial returns as well as increasing competition from new entrants drove the industry to rethink its busi-
ness model. Profit margins were a factor in the decision, or rather a lack of profit margins in loan origination (credit
risk management, for example). The entire experience culminated in credit-mortgage securitization, and the stan-
dardization and simplification of products. Today, loan origination in the mortgage industry is separate from process-
ing, which is dominated by a handful of large traditional players that have established industry-wide processing utilities.
Case in point: Homeside Lending, a Bank of Boston creation. In a radical departure from traditional mortgage
banking, Homeside was launched in 1995 to sell and service mortgages of new banking partners. Shortly thereafter,
Homeside exited the retail side of the business to focus exclusively on servicing. By originating loans largely as a whole-
sale lender, Homeside keeps loan acquisition costs low and does not need to support a brick-and-mortar franchise.
Homeside built its servicing portfolio by forming strategic alliances with preferred partners that originate the loans
including Barnett Bank, Cendant, Bank One, Peoples Bank and Merrill Lynchand offers co-branding servicing
to its partners. Today, Homeside ranks sixth in the United States for residential mortgages with approximately 2 mil-
lion loans and US$150 billion in servicing volume.
Credit cards evolved along a similar path. Today the processing and servicing of credit cards has consolidated around
a handful of firms that, like mortgage firms, benefit from economies of scale. One leader is First Data Resources (FDR)
whose sole focus on processing makes it among the largest third-party processors of credit cards. FDR handles all card-
transaction processing and card-portfolio management for credit, debit, stored-value, commercial, private label and
oil-card issuers. The company now boasts a client base of nearly 1,500 card issuers and processes more than one million
transactions an hour, settling, on average, more than US$3 billion daily. For the most recent two-year period, the stock
price of FDRs parent company (FDC) outperformed the S&P, Dow Jones and NASDAQ indices.
Insurers that embrace these strategies will have an opportunity to reposition their companies and
become effective competitors in the new financial services marketplace.
A Shift in Focus
Creating Breakthrough Value in Life Insurance
a . r. x i a i xi \
Figure 1: Insurance industry pressures
Source: A.T. Kearney
Increasing competition
Decreasing margins and profitability
Search for economies of scale
Focus on distribution productivity and
reduced dependence on agents
Decreasing customer loyalty
Focus on customer preferences
and product innovation
Changing customer
preferences and needs
Financial market scrutiny
Privatization and declining
regulatory barriers
Market entry of
new competitors
Increasing product
commoditization
Technological/e-business
innovation
: :
Many insurers have already begun separating and consolidating servicing and processing operations, where more
than 35 percent of the industrys controllable expenses are generated (see figure A). The results have been less than
optimal. For example, in some cases, insurers gain volume but not real scale to drive down costs. Some insurers are
hindered by so-called archeological layers of processes and systems that affect service performance. Still others inad-
vertently create loosely connected information islands that cannot support customer transactions nor relationships.
In almost all cases, insurers that attempt an unbundling fail to live up to the new strategic options outlined by their
leadership teams.
While technology will take care of many of these industry-specific issues, the larger challenge lies in convincing
companies to shift their traditional focus from products and distribution to processing and servicing. To date, the
industrys main focus has been on the product offering and distribution channels, while neglecting the potential in
the processing and servicing function. This lack of attention has led to cumbersome, outdated processes and systems,
and inhibited value creation in distribution and manufacturing.
Leaders in the insurance industry are exploring new approaches to their processing and servicing capability
recognizing it as a significant new source of untapped value and acknowledging its critical role in supporting their
virtual insurance strategies.
a . r. x i a i xi \
Source: A.T. Kearney
Advisory and program oversight of
in-force processing and servicing utility
voiics xaxaorxrxr
administrative and servicing partner
iianiiirs xaxaorxrxr
capital deployment partner
iivr ixsunaxcr cannirn
Transfer of responsibility for in-force servicing and processing
Lower fixed costs per policy
Reduction of risk-based capital requirements
Improved surplus position
Reinsurance of in-force liabilities
Figure 3: Proposed structure for the in-force business
Source: A.T. Kearney
vinruai ixrronariox vnaxrwon
Vertically integrated
business system
Deconstructed
business system
Processing
and servicing
Selling
Product
creation
Processing
and servicing
Selling
Product
creation
rnaxsirons srarr
Reconstructed
business system
Deconstruction Reconstruction
Processing
and servicing
Selling
Product
creation
Virtual integration
Figure 2: Disintegration of the traditional life insurance business model
a . r. x i a i xi \
Source: A.T. Kearney
iivr ixsunaxcr coxvaxs nrxrvirs
cavirai-nrviosxrxr vanrxrn nrxrvirs
100%
80%
Long-term
return on
capital to capital
deployment
partner
Controllable
operating costs
NPV of
business
purchased
Amount of capital
transferred to
ceding insurance
company
Before After
Policy management costs
New business related costs
Overhead costs
100%
Y%
X%
Z%
75%
Y%
X%
Z%
Insurance company general expense base analysis
voiics xaxaorxrxr vanrxrn nrxrvirs
Cost per
policy
Number of policies processed
Initial average cost per policy (including
conversion and initial investment costs)
may be higher than servicing charge to carrier
Having achieved scale and
efficiency improvements,
cost per policy becomes much
lower over time
Initial servicing
charge to carrier
Figure 4: Benefits of in-force business partnerships
a . r. x i a i xi \
Source: A.T. Kearney
Generate and
qualify leads
Communicate
benefits and
features of
products
Collect client
information
Provide quotes/
illustrations
Primary functions
Key activities
Percentage of total
operating expenses
Gather under-
writing information
Review application
and make risk
assessment
Issue policy and
complete with the
insured and agent/
sales entity
Set up policy on
the administrative
platform
Manage the policy,
billing and state-
ments
Respond to queries
Complete all
policy-related
transactions/
changes
Develop the
product strategy
Design product
features and pricing
Manage the over-
all book of business
Manage regulatory
and reserving
requirements
Overhead costs
shared by the entire
organization (e.g.,
real estate, legal
fees, directors fees)
Marketing
and sales
46%
Processing
14%
37%
Servicing
23%
Product
development
2%
Support
15%
Figure A: Breakdown of operating expenses by function
1101/15M/543
axiii cas
Atlanta
Boston
Buenos Aires
Caracas
Chicago
Cleveland
Dallas
Detroit
Los Angeles
Mexico City
Miami
Minneapolis
New York
Plano
San Diego
San Francisco
So Paulo
Silicon Valley
Stamford
Toronto
Washington, D.C.
asi a iaci ii c
Bangkok
Beijing
Hong Kong
Jakarta
Kuala Lumpur
Melbourne
New Delhi
Seoul
Shanghai
Singapore
Sydney
Tokyo
iuioii
Amsterdam
Athens
Barcelona
Berlin
Brussels
Budapest
Copenhagen
Dsseldorf
Frankfurt
Geneva
Helsinki
Istanbul
Lisbon
London
Madrid
Milan
Moscow
Munich
Oslo
Paris
Prague
Rome
Stockholm
Stuttgart
Vienna
Warsaw
Zurich
For more information or additional copies, contact Marketing & Communications at:
A.T. Kearney, Inc.
222 West Adams Street
Chicago, Illinois 60606 U.S.A.
1 312 648 0111
fax 1 312 223 6200
email: insight@atkearney.com
www.atkearney.com
EDS, the leading global services company, provides strategy, implementation and hosting for clients
managing the business and technology complexities of the digital economy. EDS brings together
the worlds best technologies to address critical client business imperatives. It helps clients eliminate
boundaries, collaborate in new ways, establish their customers trust and continuously seek improvement.
EDS, with its management consulting subsidiary, A.T. Kearney, serves the worlds
leading companies and governments in 55 countries.
Copyright 2001, A.T. Kearney, Inc. All rights reserved. No part of this work may be
reproduced in any form without written permission from the copyright holder.
EDS is a registered mark of Electronic Data Systems Corporation.
A.T. Kearney and the A.T. Kearney logo are registered service marks of A.T. Kearney, Inc.
A.T. Kearney, Inc. is an equal opportunity employer.
aiii ca
Johannesburg
C
o
v
e
r

i
l
l
u
s
t
r
a
t
i
o
n
:

K
e
v
i
n

P
e
s
c
h
k
e

A.T. Kearney is an innovative, corporate-focused management consulting firm

known for high quality results and its working-partner style. The firm was established
in 1926 to provide management advice concerning issues on the CEOs agenda.
Today, our 5,000 employees worldwide serve the largest global clients in all major industries.
A.T. Kearneys offices are located in 61 cities in 37 countries in Europe, Asia Pacific,
the Americas and Africa. A.T. Kearney is the management consulting subsidiary of
EDS and can be visited on the Internet at www.atkearney.com.