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Why dollar life insurance is a profitable investment during crises

According to experts, the depreciation of the tenge has already amounted to 13% since the year beginning. During the national currency devaluation, inflation accelerates, and the purchasing power of the population decreases. This situation, however, has its pros. During the depreciation of the national currency, domestic production develops, sales of local goods grow, as it becomes unprofitable for people to buy imported ones due to a sharp rise in price. The advantage for the country is that export earnings are rising as tenge revenue increases due to depreciation compared to hard currency. In this case, there is no need to spend gold and foreign exchange reserves. Who else benefits from the difference in rates, we will tell you here.
Why dollar life insurance is a profitable investment during crises

Those who prefer to keep money in dollars benefit along with exporters and domestic producers of goods. Bank deposits bring not more than 1% per year to their clients, so the life insurance companies’ clients are in the most fortunate position, as they are offered dollar policies with a yield of up to 4% per annum.

“The currency diversification of savings is important not only in times of crisis. The currencies of developing countries, such as, for example, tenge, are sensitive to external factors (changes in oil prices, geopolitical risks and others). During the volatility period in the currency markets, the appetite of investors for stable currencies of developed economies grows. If a person pursues the goal of accumulating funds with a long-term investment horizon, then the savings currency must be reliable and liquid. The US dollar is such a currency, one of the main reserve currencies of the world. And in times of crisis, the result of the correctness of such a strategy is clearly visible,” says Kairat Chegebayev, the Board Chairman of LIC Nomad Life.

Besides, having no taxes on income is one of the insurance products’ advantages. The client does not need to spend time searching and selecting financial instruments, individual stocks or bonds for investment, there is no need to constantly monitor changes in prices for them, since the product is not subject to negative volatility, and as a rule, volatility, if it occurs, is in favor of the client. “The investment funds are not subject to arrest in case of claims of third parties. An additional value of such a product for the investor is also determined by the presence of insurance coverage in relation to his life and health, which lasts the entire investment period,” notes Zhanar Zhubaniyazova, the Board Chairman of LIC Halyk-Life.

LIC product line

LIC Halyk-Life offers the Halyk-Kazyna life insurance program, which guarantees a return on investment of up to 3.52% per annum in foreign currency, depending on the term of insurance. “Last year, our Company attracted more than 17 billion tenge of insurance premiums under this program. The insurance policy under the Halyk-Kazyna program is of interest to those who want to receive return on invested funds, protect their own savings from fluctuations in the exchange rate of the national currency, and also have insurance coverage for the period of savings. The main condition is a one-time payment of the entire amount, since the Company indexes the client's money into foreign currency,” the company executive shares.

The Nomad Gold insurance product is suitable for conservative clients who want to have savings in foreign currency with a guaranteed rate, an alternative to bank deposits and mutual funds consisting of bonds in foreign currency. This product is secured by investment grade bonds. The guaranteed rate of Nomad Gold is 2.6%–3.41% per annum. “Another savings alternative is the Nomad Gold Invest (Unit linked) product. The insurance premium consists of two parts, 10% are with a guaranteed rate of 2.6% - 3.41% depending on the term, where the collateral is investment grade Eurobonds, 90% are invested in the largest index funds and are passive areas,” says Kairat Chegebayev.

Nomad Life officers emphasize that the client has 10 investment areas in his arsenal. A person can move his savings between investment portfolios as soon as possible (within a few days). As a result, it is possible to invest the savings in passive investment areas, for example, the investment portfolio of the “500 largest US companies”, and can also invest in several different areas, according to his desires and risk appetite. Thus, at the moment of volatility in the stock markets, the client can transfer funds to the Treasury bonds investment portfolio and wait out the correction.

Centras Kommesk Life has developed the Satti Omir endowment life insurance program with indexation with participation in profit, it allows provide financial protection against the consequences of accidents and illnesses and simultaneously increase savings protecting them in case of changes (fluctuations) in the exchange rate.  

“The insurance policy currency: tenge in equivalent to the US dollar, the client receives guaranteed savings with a higher yield than foreign currency deposits, depending on the term of the policy. The profitability is fixed for the entire period of insurance. You can insure for a period of 3 to 15 years. Insurance payments and redemption amounts are not subject to taxation. Also, the endowment agreement is not included in the list of recoverable property and is not subject to declaration. Insurance coverage of the client is valid all over the world,” emphasizes Gulzhan Dzhaksymbetova, the Board Chairman of LIC Centras Kommesk Life.

LIC Freedom Finance Life has developed three endowment life insurance programs indexed to the dollar exchange rate, each of them has its own characteristics and conditions. For example, under the Freedom First program, it is possible to conclude an agreement online without leaving home, replenish it at any time and receive a partial payment during the accumulation period. The term of insurance under this program is from 2 to 5 years. The income, taking into account the annual effective interest rate, is up to 2.76% in US dollars. “The agreement on Freedom Capital is concluded for a period of 3 to 10 years. The annual effective interest rate in USD is up to 4% and in EUR up to 1.5%. The insurance premium is made at a time, - says Azamat Yerdessov, the Board Chairman of LIC Freedom Finance Life. - The Freedom Money program has a savings period under the contract of 5 years and more. The insurance premiums can be paid with a certain frequency (monthly/quarterly/semi-annually/yearly) or at a time. This program can include various additional types of insurance coverage in case of disability, injury, critical illness. Payment of savings at the end of the contract is with indexation to the US dollar.”

How do insurers make money?

The investment principles are the same for all organizations that carry investment activities. It should be noted that the list of financial instruments for insurance companies may be limited by regulatory requirements for compliance with the requirements for the adequacy of highly liquid assets. Besides, the list of debt and equity financial instruments is limited by the investment attractiveness rating by international rating agencies.

When forming life insurance products, the insurance organizations determine a fixed income. Thus, the average return on the investment portfolio of an insurance company must be at least a fixed level of return on LIC products. As for the portfolio structure and investment strategy, each insurance company chooses its own depending on the adopted internal investment policy. “Due to the peculiarities of LIC products, a conservative investment strategy is more acceptable, which includes fixed income government debt securities, corporate debt securities with a low default risk and equity securities of large companies. The Kazakhstan stock market is small compared to international stock markets, however, there are fairly high-quality issuers on the market, whose securities are attractive against the backdrop of a good dividend policy, stable financial stability and corporate policy,” explains the executive of LIC Centras Kommesk Life.

Regulatory requirements for ratings of securities purchased by insurance companies are established by the authorized body represented by the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market. When calculating prudential ratios, the securities included in the insurance companies’ portfolios are weighted depending on the issuer's rating. “For instance, the foreign securities rated BB+ by S&P when calculating prudential standards are weighted at 100% of their market value, while securities rated B by S&P are already weighted at 80% of their market value. This approach allows insurance companies to build their own investment strategy based on obtaining maximum profitability at a moderate risk level, in compliance with all regulatory requirements by the authorized body, - explains the Chairman of the Board of LIC Freedom Finance Life.

According to Nomad Life representatives, the company's investment portfolio in foreign currency consists of investment-grade government and corporate sector securities. The weighted average credit quality of these financial instruments as of 1 January 2022 is at 'A-'. “The company's investment portfolio does not include investments in foreign currency in securities of Russian issuers (including banks). Nomad Gold Invest is asset management within the range of investment areas we offer. The main goal of each area is to follow the benchmark index. For example, the portfolio of Nomad Gold Invest “500 largest US companies” includes assets that follow the S&P 500 index,” emphasizes the Board Chairman of LIC Nomad Life.

The insurance services consumers show interest in all endowment life insurance products, including products with currency indexation. This is evidenced by the indicators of 2021 in terms of insurance premiums, which almost doubled in the life insurance class.

Photos are from open sources.

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