Against the backdrop of global interest in investment life insurance (ILI), in early April Sovcombank announced the product withdrawal from its product line just a few months after its launch. According to the bank's management, the product is complicated and non-transparent, and proposes to ban ILI as a class, allowing only qualified investors to work with it, i.e. to prevent ordinary participants of the financial market from earning this way. Banki.ru decided to find out whether the game is worth the candle, whether it is possible to earn more on ILI than an average bank deposit (6-7%), and what should the client look at when choosing a company and strategy.
How to choose an investment life insurance product
The banks reluctantly disclose the profitability of ILI agreements, because it is difficult and not very indicative to count the "average temperature in the hospital". The investor's personal income depends on a variety of factors, the entry point and the contract term in particular. It is possible to estimate the real income only by the moment of leave; that is at the contract term end. Most of the players in this market (except for RGS Zhizni, AlfaStrakhovaniye and Sberbank Life Insurance) have not yet had a mass closure of contracts. So, by the present moment it is possible to talk either about products with additional income fixed in certain intervals, or about underlying asset growth, on which the client's income ultimately depends.
In current economic realities the experts hesitate to advise what assets are worth investing in: it is impossible to predict what will fall and what will grow. As for strategies and specific investment-insurance products, which should be invested in, there are a few basic recommendations.
First, it is necessary to look at the contribution factor (CF), which will determine the potential for the product earnings. "With a low contribution factor, it will not be possible to earn a lot even if the base asset is highly profitable," said Maxim Chernin, the Chairman of life insurance development committee of the All-Russian Union of Insurers. "But we need to understand that for different underlying assets the "good" CF is different." In this sense, it is of fundamental importance to pay attention to the underlying asset of the product itself, to the dynamics of which the contribution factor is applied. A good tone on the market today is CF close to 100-120% with investing in the stock markets of developed countries (USA, EU, and Japan).
If we talk about more risky investments, for example, in the markets of developing countries, high-tech markets, commodity markets, then the contribution factor (CF) can fluctuate within 40-70%. Mathematics in this case is quite simple: if developed markets provide return of 5-10% on a long term, then investments in them make sense with CF of 100-120%, while developing markets and high-tech can bring 15-25% which will make it possible to get a decent income and with 50-60% participation. "Try to consider precisely, what profitability was demonstrated by the underlying asset for the last 5-10 years, in order then to apply the contribution coefficient to it, to be able to compare the possible profitability of the ILI product with its expectations and alternative instruments, for example, deposits. The account manager usually has this information and can provide it at your request", advises Maxim Chernin.
The second important point to pay attention to when choosing a particular product is the bank commission. Too high commission "eats" all clients’ incomes. You have the right to require the seller bank to disclose the amount of its commission, in accordance with the law, they have to do it.
It is also important that the ILI agreement with a long term has a greater profitability potential. "I more believe in a product with investment period close to five years. It has potentially a higher profitability, because the insurer has to pledge a larger fixed part in more reliable but less profitable assets of short-term contracts in order to guarantee the client return of invested funds", says the head of the ARIA committee.
Too high commission "eats up" the entire client’s income. You have the right to require the seller bank to disclose the amount of its commission, as according to the law, the bank is obliged to do it.
The size of the money-back guarantee is also very important when choosing an investment life insurance product. As explained by the expert, most of the current contracts are guaranteed a one hundred percent refund of the contribution amount, but no law regulates this issue. The market already has products with a guaranteed return of 110% of the invested amount, and products with a guaranteed return of less than 100% may appear.
By the way, investment life insurance is a purely Russian invention. This is a variation on the topic of so-called unit linked, or equity life insurance in the domestic terminology, where there is no one hundred percent guarantee of return on investment. The Bank of Russia is going to develop this kind of product, it is written in the published strategy of development of life insurance by the regulator for a broad discussion. At the moment, there is simply no legislative basis for existence in the Russian Federation.
The redemption sum is also important, i.e. what the client can receive upon early termination of the contract. It cannot be ruled out that you will urgently need invested funds, but the ILI contract implies the repayment of only a portion of the invested, if the term of the contract has not expired. It is understandable: early withdrawal of funds from assets will almost certainly result to the loss of part of investment income.
Maxim Chernin advises also to pay attention to various options in the ILI agreement. For example, there are contracts with possibility of fixation investment income for a period (year, six months, etc.) and either withdraw the earned income, or add this money to the amount of the initial installment. "Today, coupon products on ILI are beginning to appear, which means the payment of amount (coupon) agreed at the start, if a trigger event happens," Chernin said. A similar "trigger event" can be, for example, keeping the value of the underlying asset at a certain level. If this condition is not met, coupon income is not paid.
An important moment in the Russian market volatility might be the opportunity to change the underlying asset: for example, to move from "oil" to US dollar.
Keep records if you can
Banki.ru asked the leading players of the market on their profitability on investment life insurance and the underlying asset growth.
Clients of IC "Sberbank Life Insurance" in 2017 recorded additional income on ILI policies for a total of about 1 billion rubles, and the amount for the option "payment of additional investment income" amounted to 375 million rubles. According to the insurer, the investment income recorded and paid was 10% from the policy. The largest number of fixations and payments on ILI agreements with strategies "New Technologies" (average yield was 37.5% per annum), "Sberbank Equity" (8.3%) and "Global Bond Fund" (6%). The maximum amount of fixed income in 2017 for specific policies was 60.61% for the Global Bond Fund strategy, 46.41% for the Sberbank Equity strategy and 43.21% for the New Technologies strategy.
In “VTB Life Insurance”, the most profitable as of 2017 were the investment strategies "Gold" and "World Wealth". "In general, the underlying assets growth for different strategies as of 2017 amounted to 12%. The average profitability on closed in 2017 ILI contracts was 6-7% per annum, "- said Banki.ru CEO Maxim Pushkarev...
General Director of IC "RGS Life" Yevgeny Gurevich says that on average for the majority of clients of the company whose payments to be made in 2018-2019, the profitability of 10-20% is expected on the fees paid.
"Within independent investment a client can get more, but there are risks not only in interest, but also in the entire “body” of investments. The ILI programs, giving the absolute guarantee of initial investments’ safety, present people who make the first steps in investing a unique opportunity to manage their capital with minimal risk of losing money", the speaker believes.
The key product of ILI Company Renaissance Life is based on the principles of trust management; investments are made in securities, rather than derivatives, like with most life insurers, and the company is actively trading. "At the moment, we propose four main strategies that vary in risk: "Conservative" (the minimum share of investments in stocks), "Balanced" (moderate share of investment in stocks), "Aggressive" (increased share of investments in stocks) and "Aggressive plus" (a large share of investments in shares)", says company president Oleg Kiselev. - The average return on the contribution for the five-year ILI policies ended in 2017 were 7.8% per annum in our company. The highest return was shown by the most risky strategies".
According to Maxim Reshetnyak, the head of the product development group of IC Uralsib Life, the growth of underlying assets under ILI contracts in the company ranges from 1.5% to 10%. "We have not had any closed policies yet, because the company's ILI sales started in November 2015; and the minimum term of the contract is three years. In our line of investment strategies, the most profitable by the end of the year was "World Market Bonds," says Reshetnyak. - It includes investments in global bond funds (M&G, JP Morgan, BlackRock, Schroders), working with reliable financial instruments distributed across different sectors of the economy. In 2017, under the ILI policies, Uralsib paid about 15 million rubles, settling about 50 insurance cases. "
In the "Ingosstrakh-Life" the first survivals on ILI are expected in Fall, 2018. As part of the company's investment strategies, the High Water Mark option is provided; it allows annual transfer of additional investment income to the client's account, in the event the asset has increased in relation to its previous maximum value fixed on the political anniversary this year. "This option was included in ILI products in August 2017, thus, the first results we will see in August - September 2018," - said the general director of the company Vladimir Chernikov.
Under the contracts concluded in the first quarter of 2017 (strategies that have worked the full year), the average dynamics taking into account the participation ratio in IC "Ingosstrakh-Life" is more than 9% per year (according to different strategies without taking into account the number of customers who went to the one or another tranche). The leaders of growth were the strategies "Innovative Pharmaceuticals" and "Balanced Growth".
"We made five payments for insurance events for a total of 2,380,654 rubles in ILI in 2017. The total number of contracts for investment life insurance in 2017 was 9,183", Chernikov told Banki.ru.
In IC "ERGO Life" the nearest payments "for survival" are expected in four years, as the sales of ILI product in the company started at the end of 2016.
The most profitable underlying asset was the Global Security index, which in 2017 grew by 29.8%, surpassing the yield of the main market indices in 2017 (for example, the yield of the S&P 500 index as of 2017 was 19.4%).
"Despite the impressive index growth, it should be noted that the income payment on ILI product is carried out at the end of the contract term. Therefore, the final yield of the product will be significantly influenced by further dynamics of the "Global Security" index, which can continue the upward trend of 2017, increasing the profitability of the product, but it can also change this trend", says Mikhail Chekhonin, Deputy Chairman of the Management Board for Personal Types of Insurance.
To summarize the intermediate results of the leading players in ILI market, we can say that the average profitability indicators still exceed the bank deposit rates (8-12% vs. 6-7%), but not as significantly as expected.
Existing products are not recorded on profitability, but this year ERGO Life is planning to launch an ILI product with an annual fixation of the achieved yield on underlying asset, which will also imply the possibility of actually paying the earned income each year, without waiting for the contract expiry date.
In addition, Mikhail Chekhonin said, it is planned to launch a new ILI product with the coupon rate fixed in the contract (Sberbank Life Insurance has a similar product, SmartPolis coupon). The coupon rate will be higher than for bank deposits or high-quality bonds, however the coupon can be accrued as fully (in the case of term fulfillment for the underlying asset dynamicst), as well as partially, or may not be accrued at the end of the year. Typically, the condition for payment is the absence of underlying asset fall during the year. This product is fundamentally different from the classic ILI product, which usually requires a significant increase in underlying asset to achieve the target profitability.
By summarizing the intermediate results of the leading players in ILI market, we can say that the average profitability indicators still exceed the rates for bank deposits (8-12% vs. 6-7%), but not as much as expected and, in many cases, promised by the bank consultants selling ILI . The most successful strategies are those where the underlying asset is securities of companies operating in new technologies (including pharmaceutical industry), as well as strategies with a "compound" underlying asset ("Global Security" of ERGO Life and Balanced Growth "Ingosstrakh-Life").
Olga Kucherova, Banki.ru