Celent Says

Are Closed Blocks Life Insurers’ Nuclear Trash?

Karen Monks
Insurance Experts' Forum, August 2, 2012

In the Nevada Desert, the U.S. Federal government has spent the last 22 years hollowing out the inside of a mountain. Yucca Mountain was—and technically still is—the United States' official repository for spent nuclear fuel rods. A series of tunnels 1,000 feet below the mountain surface has been carefully bored. The project, which was expected to cost $96 billion (£58bn) over its lifetime and hold up to 77,000 tons of nuclear waste, is situated in the most extensively studied piece of geology anywhere on the planet. It is extremely controversial and now appears unlikely to ever open. leaving the United States without a long-term solution for its nuclear waste.

As nuclear power enjoys a renaissance all over the world, the problem of what to do with spent nuclear material is high on governments’ agendas. Currently most nuclear waste is stored in wet pools at the reactor sites. Worldwide it is estimated that 270,000 tons of nuclear waste does not have a permanent solution for disposal. With nuclear energy gaining pace globally, disposal of nuclear waste is a continuing global issue.

An extreme comparison, but closed blocks are a bit like nuclear trash. Much like the way nuclear trash illustrates the conundrum that society faces, the issue of closed blocks is a conundrum that insurers face. With approximately 40 percent of all insurance policies closed today, the issue of the long-term management of closed blocks has similarities to nuclear waste management. First, both are issues that embody complexity and uncertainty. They inspire fear and insecurity. They are very long-term in character, raising questions of inter-generational equity. They raise the discussion of trade-offs: asset sufficiency versus significant financial investment and long-term security. In sum, it is an issue that requires a much better understanding of many factors including the dynamic interaction between all of the factors and technology.

As was reported in Celent’s recent research, “Strategies and Options for Managing Closed Blocks”, 92% of life insurers state they have a strategy for closed block management. However, with a 40- to 80-year run-off, it is often hard for insurers to see the immediate need for a long-term strategy. Consequently, the traditional approach preferred by many insurers to handling closed blocks has been to contain costs and manage the run-off internally. Similar to holding nuclear waste in wet pools at the reactor sites, the long term costs and risks of an ‘as is’ strategy for closed blocks are greatly unknown.

To choose the right strategy, insurers must not only evaluate the available strategies, but also the lifetime value of the closed block; they must build an accurate cost base and understand the comparison drivers; and they must understand all compliance and regulatory requirements they face. Determining a long-term closed block strategy deserves careful planning and attention in order to avoid unintended consequences because the options open to insurers for managing the closed blocks all involve risk.

As with nuclear waste, there is only so long an insurer can wait before acting. At some point, the costs and risks will be too great to for the insurer to handle. Most insurers don’t price products with the thought of ultimately closing them in mind. Consequently, many insurers now face a difficult trade-off between funding new product development activity and decommissioning closed blocks. For existing closed blocks, the cost of ‘doing nothing’ is simply too high and many insurers now need to decide upon and fund a strategy. To avoid history repeating itself, perhaps one small additional change that insurers could make today is to recognize that any new product will eventually be placed into run-off and then plan accordingly with their normal product life-cycle management.

Co-written with Jamie MacGregor, Celent Sr. Analyst, and for coverage of Celent's recent report regarding closed insurance blocks, click here.

This blog has been reprinted with permission from Celent. 

Karen Monks is an analyst in Celent's insurance practice.

Readers are encouraged to respond to Karen using the “Add Your Comments” box below. She also can be reached at kmonks@celent.com.

The opinions of bloggers on www.insurancenetworking.com do not necessarily reflect those of Insurance Networking News.

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