‘Closed Book’ bonds, what are they?
Quite simply, they are Insurance & Investment policies that are now closed to new business and are no longer sold. However, they still remain on the books of the life insurance provider as premium-paying policies.
Closed book business has become a major issue in the insurance industry. Indeed, contracts have to be serviced for long periods and need support up until the last contract in the book is no longer active.
What does this mean?
The challenge for the closed book providers is that over an extended time period these policies become increasingly unprofitable.
In-house management of these operations can present a number of problems:
- Maintaining older administration systems often have very high maintenance costs.
- As the product(s) is closed, no new policies are sold. Operational costs are spread over active policies and as the number decreases, operational efficiency will naturally decline to keep the business profitable.
- As the insurance industry is highly regulated (especially in the UK under the FCA), closed books are scrutinized by regulators and required to adhere to the principle of ‘Treating Customers Fairly’
- Declining customer service along with bad publicity as management systems change and/or reduce.
- Many clients in closed books businesses may find their original financial adviser is no longer offering advice or service.
In an increasingly competitive and dynamic marketplace, providers of closed book operations will inevitably look to reduce costs. They can either outsource the operation and management of the closed book business or sell the business to another provider or ‘closed book specialist’, such as Life Company Consolidation Group (LCCG).
The closed book marketplace across the entire insurance industry is growing rapidly. Companies look to offload closed books to specialist players. There have been numerous sales and acquisitions in recent years, including Clerical Medical International, Generali Pan Europe, Axa (Isle of Man), Friends Provident, Aegon Ireland, to mention just a few.
There are also many closed book operations that remain in house. Some examples we looked at are La Mondiale’s Private Client Portfolio & the Portfolio Bond and more recently, SEB Life as well as some of their European products.
It is also worth noting that many of these older and now closed bonds were sold on a commission basis. The advisers or advisory firms may no longer exist. Or, they might no longer wish to (or are unable to) provide advice and ongoing support.
Should I be concerned?
Although closed, these policies remain active. A continuation of the original terms & conditions and service levels should be expected.
However, many policyholders are not aware of those conditions. Any subsequent changes or restrictions following the ‘sale’ (or multiple sales) of their policies to a new provider means they are often left in the dark.
Let’s look at this from the customer’s position. The difficulty to get information and good service is the most frustrating area for clients who hold closed book bonds.
Equally, from an adviser’s perspective, gathering information from a closed book or legacy provider on a client’s behalf can be extremely time consuming. So we understand how difficult it is for clients attempting to do it themselves.
Many things can happen when a provider ‘closes’ a product, or a specialist provider takes over a closed book. In our experience, these are generally not that positive.
The underlying goal is to make a profit from a diminishing client bank without any incoming funds from new clients. Therefore the incentive to continue good service levels is not great and performance is no longer a priority.
Also, when policies have external and/or internal funds, the fund range is often reduced. External funds are switched in favour of internal and any active management may be reduced or discontinued in favour of a more passive (and ultimately cheaper) approach.
What can I do?
Firstly, speak to an adviser and we can find out if your policy is part of a closed book and which company is now managing the policy. We can then review all aspects of the policy from current costs, performance and discuss all the options available to you. This may include the management or closure of the policy in favour of a more cost effective and accessible alternative.
Take the first step
Harrison Brook is Europe’s leading independent financial advisers. We offer a first consultation and we comprehensively advise clients on various options that may benefit their overall investment. We also advise on retirement and financial planning strategies. So get in touch today!