Of the several thousand customers who buy investment life insurance policies, are satisfied with their choice. Bank sales managers came to this conclusion. People understand that they invest in the stock market with the expectation of earning a possible income, and in case of correction, return 100% of their funds. However, some investors who entered into ILI in 2012, when the portfolio was mainly formed from gold futures and the RTS index, at the end of the contract term, received low income. Comparing it with interest rates on deposits, they ask: how it happened.
In the crisis year of 2008, the value of units of some mutual funds decreased significantly due to market volatility. For some industry funds the decline was more than 40%. The mass segment customers needed a product that would provide complete protection of invested capital. Thus, investment life insurance appeared on the Russian market.
The product was positioned as an investment tool, which made it possible to get acquainted with the stock market, participate in its dynamics and have a guarantee of the entire invested amount return. However, for various reasons, due to an incomplete understanding of the ILI concept and not always a correct positioning of it on the sales managers’ part, the product was in some cases offered as a deposit alternative. Therefore ILI profitability is compared with profitability of bank deposits, although the benchmark for it should not be the average weighted rate on deposits, but profitability of other investment instruments.
The situation with ILI concept misunderstanding is a thing of the past. The All-Russian Union of Insurers (ARIA) and the Bank of Russia have issued standards that govern the ILI sales. When concluding a contract, each client gets informational materials. They clearly specify that this is not a deposit, product income is not guaranteed, and the amount of investments is not insured by the Deposit Insurance Agency (DIA).
Unit linked is a new stage of the ILI
Unit linked has been operating in Western markets for several years. You can design a product very similar to ILI based on this tool, with the only difference being that Unit linked is a more transparent and potentially more profitable tool. Its share in the financial markets of Europe is growing. According to the Insurance Europe Company, this insurance segment of the market grew by 40% in 2017 in Belgium, in France - by 36.7%, in Belgium - by 21%. Unfortunately, there are no latest statistic data on that yet.
There is a complete segregation of customer assets from company assets in the classic Unit linked. The client’s assets are not on the central asset register of the insurer. An investor sees how the value of his portfolio changes in his personal account. Information disclosure in ILI is implemented differently. The client is given the rule for obtaining investment returns, and he can track the progress of this investment condition in his personal account. Actual assets are on the balance sheet of the insurer, which can play both in favor of the client and insurer (for example, the insurer can take part of the investment risks, protecting the client from them and making extra money on it).
The second Unit linked advantage is a potentially higher return. Other things being equal the client can count on an additional 0.5–1 pp. in comparison with ILI, as the credit risk is redistributed to the client, capital protection obligations are secured by the assets in the product, and the insurer is actually relieved of the obligation to guarantee this payment with his balance. Thus, an insurer has fewer capital requirements, which means that it can reduce the fee for managing funds. This, in turn, leads to profitability increase.
Unit linked is a mass product in the west that is often used as one of the accumulation tools for specific purposes; it can be a major purchase, education, or retirement savings. I believe it can be applied for the same goals in our market. However, Unit linked cannot substitute ILI because in this product, unlike ILI, the capital protection guarantee is formed according to a different principle. The full amount is refunded by investing most of the money in reliable securities.
Photos are from open sources.