We are talking about endowment insurance, which has long worked in a classic form, and is now changing thanks to financial technology. The financial sector Competition forces us to improve supply focusing on increased profitability, including universal life insurance. Thus, when a client enters into an insurance contract with a life insurance company (LIC), pays contributions at the selected frequency, accumulates money and insures his life for the contract duration, endowment insurance, in its turn, along with a simple funded product, offers a set of investment plans with guaranteed income and dividends from participation in the investment profit of the LIC.
In practice, the algorithm for purchasing an insurance policy with an investment component remains the same. The client determines term and amount of savings and the LIC accrues interest, making it guaranteed, however, and adds dividends from the positive results of its investment activities from the third year. Different LICs offer different guaranteed returns: on average, it is up to 5% per annum in the market. As a rule, the profitability is set for the entire period of the contract.
A sticky interest rate carries certain risks for a client. If inflation continues to grow (and by the end of 2019, the National Bank expected its increase to 5.7–5.8% versus 5.3% in 2018), the real return on guaranteed income will decrease. If to compare this product with a bank deposit, the deposit is more flexible. Remuneration on deposits is promptly reviewed depending on changes in the money market. The maximum interest rate on tenge savings deposits with replenishment increased to 12.7-12.9%, and without replenishment - up to 14-14.6% by December 2019.
However, guaranteed profitability is not the main goal of funded products with investment income. First of all, it is the insurance cover to which the funded element is attached. A large amount often accumulates on the insurance policy, and a payout by the insurance company may reimburse the cost of treatment or be given to family members if the insured dies. “It is important to remember that the distinctive feature of endowment life insurance is that the insurance company returns money to the client in any case. Whether an insured event occurs or a person lives to the end of the contract, he is paid off,” explains Vitaliy Lyubimov, Managing Director of LIC Halyk-Life.
It is important that as of January 2018, endowment payments are exempt from income tax. The only condition is that a person who enters into the insurance contract and the insured (in respect of whom insurance is made) must be the same person.
And yet, playing by the rules of the competitive market, LICs offer additional profitability to the client. The companies began to share part of their investment profit since 2019 distributing insurance dividends to the accounts of customers whose savings products were with an investment component. As of 2018, the dividends amounted to about 5-5.75% on average in the market with annual inflation of 5.3%.
It is important to note that insurance dividends differ from usual interest added annually under the deposit capitalization.
“There are different forms of insurance dividends in world practice. Sometimes the contributions on main program are reduced, sometimes the insurance amount increases. At times dividends are given out in cash. In Kazakhstan, the practice has taken root when the insured amount increases. Suppose you are insured for 5 million tenge and pay 200 thousand per year. Three years have passed, the policy has participated in investment profit, the company has distributed it among customers, and now the insurance amount is not 5 million, but 5.3 million tenge. If the insurance period is 20 years, then (from the third year) a decent amount is accrued,” says Ramay Kurbangaliyev, Sales and Regional Development Department Director at LIC Nomad Life.
“The insurance amount under the contract grows due to this distribution, respectively, the size of insurance coverage and amount that the client receives at the end of the insurance period increase. The dividend percentage to be paid is decided at the end of the calendar year, - says Lyubimov. - Therefore, 5% is guaranteed for the entire insurance period, and the additional profitability depends on the results of the work: how the LIC works and divides the profit from investment activities.”
A relative novelty of funded products with investment returns and little sales experience are pushing LICs to marketing experiments which are expressed in a line of identical at first glance products that confuse the client rather than help determine the desired savings plan. Product abundance is observed in companies with good resources for product administration. Small LICs sell only a few products, both simple and investment, and do not plan to develop endowment insurance. This is due to the fact that the prospects for endowment insurance are ambiguous and depend on the macroeconomics and financial well-being of society. The target audience of accumulative products with an investment component is people with average income and lower who are able to pay an annual average contribution of 150-200 thousand tenge. The insurance premium amount depends on gender, health status and age of the insured client. The older a person, the less beneficial is endowment insurance, because his risks are growing, and insurance cost is increasing with them. Therefore, insurers advocate the development of insurance culture from a young age, this financially disciplines, and insurance is cheaper.
“Universal life insurance can actively develop in conditions when the average person has a spare amount from wages. People are not ready to buy voluntary insurance services in large quantities, including life insurance, to the extent that Western Europe is insured today. The con is that it is difficult for LICs to provide acceptable market pricing, as its investment opportunities are limited compared to insurance companies in developed countries. There is also a pro: company employees make every effort to develop the product in these conditions,” comments Lyubimov.
One of the promising areas is life insurance products with protection of accumulations against exchange rate fluctuations (but without participation in LIC profit). Four LICs are already offering a similar product. Unlike classical accumulation, when the client makes periodic payments over a long period of time, the product with reference to the exchange rate has a pronounced investment character because the client makes the one-time payment. The product is designed for citizens with high income; its average cost is $60 thousand. The policy is sold as an alternative investment of free cash that the client will not need in the near future. There are fewer customers on the product. However, sales volumes are ahead of other accumulative products precisely because of their interest in the triple offer: insurance coverage, guaranteed profitability and protection against tenge devaluation.
Insurance companies cannot accept and make settlements in dollars according to legislation. Clients make contributions in tenge that are recorded in dollars at the current exchange rate. The LIC will recalculate the amount back in tenge and pay it at the current rate in the insurance event or at the end of the insurance period. The client receives an additional guaranteed foreign currency income in the amount of from 3.1 to 3.41%.
The currency plan is interesting for those who want to get foreign exchange returns higher than a bank deposit. After the outflow of retail deposits in foreign currency, banks increased the maximum rates on deposits in foreign currency with term of more than 12 months from 1 to 2% as of summer, 2019. The LIC rate remains attractive with increase being lower than the yield earned by currency mutual funds though. According to the results of November 2019, their profitability ranged from 7 to 10% per annum. It is important, however, to remember that mutual funds are a more risky tool. The management company does not promise or guarantee profitability, which depends on the investment strategy and situation in the financial market. The investor accepts the market risk.
“The programs of universal life insurance tied to the dollar exchange rate have found their niche because the terms are simple and comprehensible to an ordinary person who has no special financial education. Such programs have similarities with deposits and own advantages, therefore, they are easy to sell. However, these programs are not enough for a fundamental development of endowment life insurance,” notes Lyubimov.
He insists that in terms of its consumer value, a policy is not an alternative to deposit but a combination of two financial products, deposit and insurance. If we compare a policy with mutual fund, where a client also makes a lump sum, then in case of health problems the mutual fund shareholder remains with them one on one. With life insurance, even a month after issuing an insurance policy, in case of an insured event, the client receives the amount that should have been paid for 10 years.
“If a person decides for himself that nothing will happen to him, it is better to go with a mutual fund, there will be more profitability there. However, in the modern rhythm of life, when each of us may encounter troubles associated with harm to life or health at any moment, it is better to buy life insurance services,” Lyubimov believes.
LICs are ready to go further in the development of saving investment products.
“We have received a license to manage investment assets and are planning to add an option that will allow the customers to use the company not only as an insurance company, but also as an investment one. We will invest money in various instruments and earn profitability,” said Kurbangaliyev.
Thus, LICs will be able to offer new income from investment activities. The insurance premium on investment product will be divided into two parts, one of which to be invested according to the strategy adopted by the company, and the other – according to the client’s wishes. If the customer takes risk and wins, he receives additional income. “This is a beginning of unit-linked, which in the future will directly compete with mutual funds. In this case, the client will receive three in one: an alternative to deposits, insurance coverage and the possibility of investing in mutual funds, that is, the one-window principle,” says Kurbangaliyev.
Endowment insurance is only developing and it is open for new players. However, the policy cost is not a reason suppressing LICs. In case of dumping the tariffs are leveled out in a short time. Service is important in insurance, it is rare when a client analyzes the offers himself and turns to a company for a policy. Most often it is necessary to prepare the seller who will find a client and explain all the advantages of long-term insurance accumulation.
The companies are now focusing on training salespeople who are more like financial advisors. The insurance market has dreamed about it for 10 years. The sales staff will not only advise on life insurance products but also have information on bank deposits and mutual funds in order to develop a financial plan where life insurance will be present in different roles. The LIC activity will benefit average Kazakhstani citizen, as competition promises interesting offers. The government helps life insurance as much as possible. As of 2019, LICs are part of the insurance guarantee system.
Photos are from open sources.