PREVENCIÓN JURÍDICA

Figure 22: Firm template: early to mid-1990s⁵⁰

50 As also shown in tabular form in Table 21 (section 4.3.2.2)

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While an intermediate market had grown for advice and distribution and fund components, insurance companies remained vertically integrated in terms of IT systems architecture, customer services, and administration. One of the primary factors associated with insourcing IT is the sheer complexity of the systems and the knock-on implications for product design.

For example, “getting the system to talk to other systems without developing a whole brand new system was impossible. The system was very old – maybe it could have talked to other systems but the people were not around who built it to have the conversation” (9).

Efficiency considerations also play a role, “Cost came into it. More cost to use suppliers. It was our product, on our system, it was our sales force selling it, our funds, managed internally, and you can manage the costs better that way. As soon as you start outsourcing different components, a) you’ve got the initial costs of building the things, and allowing everything to talk to each other, and b) you’re kind of exposed to the costs of that third party, you don’t have the same control over those costs (1), and“I suppose it was about control, the lack of control you had, and the risk you were building in, the risk being that if the costs do go up, how easy was it back then for you to change suppliers. Once you’re tied into a supplier, you don’t have the capability of plugging another one in, you were kind of linked in to the heart of the supplier, it was more of a risk really” (17).

In order to efficiently use intermediate markets, it was recognised that there was a need to simplify information exchange and reduce complexity. For example, the scale of the product development issues are highlighted “if you try to cut up the pie and see all the effort that went into the product, 80% of it or more would be the systems build and a small amount up front trying to decide what the product looks like in the first place. But the vast majority was on the systems build so that was the critical path on all developments” (4).

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With the introduction of modern personal pensions in 1988, and hence exponential growth of unit-linked product architectures, speed to market became a significant strategic issue and simplifying the product architecture and so facilitate the use of intermediate markets became critical. For instance, “we don’twant it to cost twice as much because you’re componentising it, but it’s not actually about cost, it’s the timescale we’re worried about really” (4), and speed was one of the main factors in simplifying the interfaces for fund components, “where we’ve simplified he fund addition process, it was time to market. I think cost and time were embarrassing and there’s no doubt about it, you felt like a big clunky organisation, it takes a long time to get something to market, losing market share. So I think time to market was pretty key and the overall cost is pretty key and there were some eye watering costs” (4). The respondent continued “Yes, I would have said internally whether its funds or the whole system, the idea of a componentised model would make things easier and we could just link these components together to make the whole development easier, and the battle was how do you change this great big monolithic piece of code into a componentised thing?” ^(4).

Accessing external specialised fund management productive capabilities was another key factor in driving insurance companies to adopt unit-linked product designs. As one respondent recalls “what we'll never be able to do is be a top investment group in every aspect for all scenarios; so what we want to do is to offer expertise that we don't have, necessarily on a wider basis from fund management groups who know how to manage money” (26). As such, “the hypothesis was that you would not get as good investment performance as you would if you outsourced to people who are experts in fund management in different asset classes and different countries” (25). Rather than being specialists, insurance company in-house fund management teams were often ‘jack of all trades’. This lack of specialisation presented a problem, “they were trying to research Japanese equities from the UK, how on earth do you recommend a buy or a sell of a Japanese equity if you've never been to see the directors of the firm? All you're looking at is the report and accounts.

You probably aren't big enough to even pick up the phone and talk to them and have them talk to you because they'll probably go: “who the hell are you?”. So, actually what you need is either local fund managers in the various markets for equities or firms who are experts in a particular asset class. Whereas, you've got this sort of 'jack of all trades' fund management business sat inside the insurance company” (25).

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However, while the unit-linked insurance companies collaborated and outsourced to upstream fund management groups with relish, the traditional with-profit based insurance companies were slow to follow, continuing to focus on their own productive capabilities in ‘with-profits’

fund management. As one respondent suggests, “in that initial stage, they were the traditional players and therefore unit-linking wasn't seen as being necessarily immediately something they wanted to get into” (26).