Life isn't all about migrating books

Why
is it that acquisitions of Life & Pensions companies and books don’t
realise the benefits that are stated at the time of the deal?

On
the face of it bringing L&P companies and books together should be a sure
fire way to make a lot of money from rationalising the systems, reducing the
staff employed in back offices and closing head office functions.

However
time over time the benefits realised are far less than expected. You only have
to look at the TCS acquisition of the Pearl’s business in their Diligenta
vehicle or the Resolution acquisition of Lloyds Banking Group’s closed book L&P
business to see that these acquisitions are not simple.

Why
is this and what can Aviva do to learn from the past to ensure that they are
more successful than others, including Friends Provident, have been at maximising
the benefits of bringing Life & Pensions books and IT together?

Pragmatism is key to
realising the benefits

By
taking an altogether more pragmatic approach than their predecessors and taking
more pain early Aviva has the opportunity to gain far greater benefits in the
longer term than previous integrators.

One
of the principal reasons that previous deals have proved to be more difficult
is that they have looked at the consolidation of the L&P books as an IT
Programme rather than a business programme. They have tried to answer the
question how do I bend my existing systems to cope with the new products that I
want to migrate onto my platforms?

However
the question that they should be asking is a commercial one and that is what is
the case for migrating any of the books onto the target platforms?

Pensions are
different from other products

The
problem is specific to the closed book Life & Pensions industry.

There
is a big difference between pensions and other types of products. Most products
have a shelf life that can be measured in months or at best a few years. The
life of a pension product is measured in decades, theoretically for as long as
the last customer is still alive. To add to this there are also lots of
different variations of products. The reason for this is that pensions products
are designed by actuaries. Actuaries are incredibly smart people who love to
create complex mathematics models to calculate when customers are likely to die
and therefore how to ensure that a product makes a profit by paying out less
than it takes in contributions. The character of actuaries has led to them
designing pension products that are esoterically pleasing to them, incredibly
difficult to understand for the average consumer and highly complex which has
resulted in nothing such as a standard pension. The low boredom threshold that
actuaries have has resulted in lots of different products rather than sticking
to a product that worked for most customers. This means that any Life &
Pensions company that has been around for even a few years will have a large
number of pension products and often (particularly for products that were
created many years ago and where most of the customers have subsequently died)
low volumes of customers.

The
reason that these products are highly profitable is because they were designed
to be complicated so that no normal customer would be able to understand how
the products work, particularly how the charges are calculated and how much of
the pension contributions that the insurance company retains.

The
result of this is that in order to maximise the benefits from integrating the
Friend’s Provident books Aviva should classify the books into three groups.

Books need to treated
in one of three ways

The
first group is those books which are either too small and/or too different from
Aviva’s existing systems and requiring too much manual work to support to justify
migrations. For the customers of these books Aviva should consider buying them
out of the products or offering to swap them into a modern product. While this
will cost Aviva in the short term it will both save them in the longer term and
potentially buy them goodwill from those migrated customers.

The
second group is those books which are too different from Aviva’s existing books
but still have sufficient volume and generate sufficient cash. These books they
should resign themselves to keeping on the Friends Provident systems and find
ways to reduce the cost of running those systems through renegotiating terms
with outsourcers or looking at alternative ways of supporting those systems
such as in the cloud or paying on a process as a service (PaaS) basis.

The
third group is those books which are sufficiently similar to Aviva’s existing
books that the changes to the existing platforms will be minimal and the
benefits of migrating them onto the Aviva systems significantly outweighs the
cost of the migration.

Can Aviva learn the
lessons of the past?

Of
course the reduction in platforms and the rationalisation of back offices and
call centres are only two of the primary drivers of benefits for the
integration of Aviva and Friends Provident. There is also the rationalisation
of Head Office functions which should release further costs.

However
the primary reason that Aviva wants to acquire Friends Provident is the
reduction of capital that will be required as a result of all the cash that the
closed books of Friends Provident throws off. This will not be realised unless
Aviva learns the lessons from the past and takes a very pragmatic, commercial approach
to the integration accepting the financial pain in the short term will be worth
it in the long term.

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