Unlocking the Value of in-force Insurance

In-force insurance policies can be a hidden treasure trove of value for policyholders.

By reviewing and optimizing their policies, policyholders can potentially save thousands of dollars in premiums.

In fact, a study found that 75% of policyholders have unused or underutilized coverage, resulting in unnecessary premium payments.

This wasted money could be put to better use elsewhere in the household budget.

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An insurance policy is considered "in force" when it's active and coverage applies to the policyholder. This means the premium has been paid, and the policyholder keeps their insurance active by continuing to pay their premium.

In-force life insurance refers to the coverage amount that's currently active, not the total amount of coverage purchased. For example, if someone has $500,000 worth of in-force life insurance, that's how much active coverage they have.

The sum total of a policyholder's life insurance coverage that's paid up and active accounts for how much coverage is "in force." This can include multiple policies, such as a $500,000 term life insurance policy and a $250,000 whole life insurance policy.

Insurance companies also use the term "in force" to refer to the total value of coverage they've issued. This is the sum of all current life insurance policies, which can be a significant amount, like $2 billion.

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For life insurers, Value of In-force (VIF) is a powerful tool that offers a fresh perspective on performance assessment. This is because VIF provides an economic view of value, untainted by conservative assumptions or smoothing impacts from past actions.

One of the key applications of VIF is understanding each line of business's contribution to value. This helps inform capital allocation decisions, which is crucial for making informed business choices.

Reconciling Value of New Business (VNB) to pricing is another important application of VIF. This independent check on pricing models, assumptions, and experience ensures that pricing is accurate and effective.

VNB and VIF can also be used to define management actions and articulate strategic planning. This helps life insurers stay focused on their goals and make data-driven decisions.

VNB and VIF can even be components of short-term and long-term compensation plans. This means that performance is rewarded and recognized, which can boost morale and motivation.

Analyzing the sensitivity of VIF and VNB to their underlying assumptions is a great way to demonstrate good risk management capabilities. This shows that life insurers are proactive and forward-thinking in their approach to risk management.

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Calculating and reporting VIF on a regular basis produces strategic insights in a number of key areas.

Companies that already calculate VIF should ensure they have a robust system of governance and controls, including external review. This is crucial to maintaining the accuracy and reliability of their VIF calculations.

To get started, companies that are not yet calculating VIF should establish a road map and begin making decisions on the methodology and assumptions. Engaging financial modeling and reporting teams early in this conversation can help ensure existing processes are leveraged for greater efficiency.

Companies should also consider using VIF as an independent check on pricing models, assumptions, and experience, as it can help reconcile VNB to pricing. This can be a valuable tool for identifying potential issues and making informed decisions.

Here are some key steps for companies to follow:

Optimizing your in-force book through operational levers can have a significant impact on your internal rate of return. Insurers can boost their internal rate of return by up to 60 percent by optimizing their in-force books through structural and operational levers.

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Outsourcing is one operational lever that can help. By outsourcing certain tasks or functions, insurers can free up resources to focus on more valuable activities.

Pulling several operational levers in tandem has a multiplier effect, allowing insurers to achieve greater results than they would by using a single lever alone.

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Only 22% of respondents in a recent poll said they have a systematic framework in place for in-force management. This suggests that many insurers are missing out on opportunities to optimize their in-force book.

In fact, just over half of respondents said their efforts are organized by line of business, which may not be the most effective way to manage in-force life insurance.

A study found that insurers who optimize their in-force books through structural and operational levers can boost their internal rate of return by up to 60 percent. This is a significant opportunity for insurers to improve their performance.

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To take advantage of this opportunity, insurers should consider using various levers, such as transactional, structural, and operational levers, to optimize their in-force book.

Here are some specific levers that insurers can use:

By using these levers, insurers can unlock significant value from their in-force book and improve their overall performance.

Life insurance policies lapse when a policyholder fails to pay the premium. If a policy lapses, the coverage becomes inactive, and the policyholder is left with only the term life policy's benefits, if they're still paying premiums on that.

Insurance companies use a measure called Value of In-Force (VIF) to assess performance across diverse lines of business. This measure is more economic in its view, not distorted by conservative assumptions or smoothing impacts from past actions.

VIF is used in various ways, including understanding each line of business's contribution to value, which helps inform capital allocation decisions. It's also used to reconcile Value of New Business (VNB) to pricing, providing an independent check on pricing models, assumptions, and experience.

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Reconciling VNB to pricing is an independent check on pricing models, assumptions, and experience. This is done to ensure that the pricing is accurate and not distorted by any factors.

VIF and VNB can be components of short-term and long-term compensation plans. This is a way to tie the performance of the insurance company to the value it creates.

Analyzing the sensitivity of VIF and VNB to their underlying assumptions is one way to demonstrate good risk management capabilities. This involves understanding how changes in assumptions affect the value of the insurance company.

Here are some common applications of VIF for life insurers:

Insurance-in-Force is an intangible asset available to an insurance firm. It's an active insurance policy with a continuing payment of premiums by the policyholder.

Insurance-in-Force can be valued using techniques under the income, market, and asset methods. This is done to determine its fair market value.

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In-force life insurance refers to the coverage amount that's currently active. If someone states they have $500,000 worth of in-force life insurance, that's really just a fancy way of saying how much active coverage they have.

The sum total of the policyholder's life insurance coverage that's paid up and active accounts for how much coverage is "in force."

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