Amendments:
1. Insurers are offered to have a risk component of policies (in case of death) mandatory, since they position the ILI as a product with a risk and investment component. Most market participants have the death risk in their insurance investment products, but there are exceptions.
2. Insurance coverage on ILI will be effective from the date of payment of the first installment. A several month deferral can be provided now; this is how insurers minimize the risks of domestic fraud so that the insured does not go for a policy after the occurrence of an insured event.
3. In the event of the death of the insured, the payment must be at least twice the amount of the insurance premium. So far, there is no such requirement, that is, everything depends on the insurer’s generosity. However, there are products with large payments when this risk occurs.
4. The insurers should provide mechanisms for capital security and profitability under any ILI agreement and short-term endowment (for a period of less than seven years). In the current versions of the products, 100% capital security is not always provided; there are products with protection of 80% and below. If the ILI strategy turned out to be unprofitable, the insurer at the end of the contract would return the client even less than the amount originally paid.
5. The policyholder will be able to give up the investment insurance before the third installment is paid with a refund of 100% of the amount paid.
Shock of the product economy
Insurers seem to have been somewhat shocked by the regulator's proposals, and most of those surveyed declined to comment. “We cannot comment at the moment, since there is no full and final version of the regulation yet, now all representatives of the insurance business are in close and constant interaction with the regulator on the issue of new terms of sale for ILI and ULI, - they note in AlfaStrakhovanie-Life adding that they are always focused on ensuring that customers receive their income. - On the basis of this principle, ILI and endowment products were developed. Quality sales are important to us, so our sales practices provide all customers with comprehensive advice on products they buy.”
“Misselling is a subjective concept: whether understood correctly or incorrectly, but the cancellation of contracts during the “cooling period” is an objective concept, - expressed his opinion Alexey Rudenko, General Director of Rosgosstrakh-Life, at the conference “InsurSelling-2021. Insurance sales”. - In 2019, we saw a surge in cancellations; it reached 20-25% in certain segments. 10% of contracts on average are canceled on the market now, and in some companies this index is 5% or less. But even 5% of the life insurance market is tens of billions of rubles of lost opportunities. Therefore, the work should be continued.”
According to Viktor Dubrovin, Vice-President of the ARIA, the requirement to return 100% of contributions before the third installment is seriously changing the existing practices and economics of the product. “The contracts come with quarterly and annual installments, so the third installment may fall in the third year, and this means that the “cooling period” becomes multi-year, and this despite the fact that the insurer incurs serious expenses from the first day (acquisition costs, formation of reserves, depository commission, commission on security purchase, etc.),” he says. And the insured can leave in two years.
The introduction of a two-fold amount of payments for the death risk will be less painful for the market; it exists now but not in 100% of products, so in this case, it is about standardization.
Taken as a whole, ARIA expects the cut of a wide product line, as the proposed approach changes the economics of insurance products and reduces the opportunities for competition and individualization.
Is it bad to have a narrow range of choice?
“Any movement towards transparency should be perceived positively by buyers of services and cause a negative reaction from sellers - this is absolutely normal, - says Alexey Krichevsky, an expert at the Academy of Finance and Investment Management. - This especially applies to ILI, because it is more or less clear with endowment: the insured has a goal to accumulate some amount for a certain period, and he insures the risks of disability through regular contributions. There is no transparency in ILI.”
Investment insurance has been transforming so quickly over the past few years making it really difficult for an inexperienced consumer to understand it.
ILI policies are a complex product that has an insurance part of about 80% of the premium paid by the insured in average (it may differ for different insurance companies). The insurer invests this part of funds in conservative instruments, for example, government bonds or a deposit. They do not bring much earning but they grow to 100% of the initially invested funds by the end of the contract. The second smaller part of the money is intended for earning extra investment income, that is why it is invested in more risky instruments, for example, shares of world companies, indices or options (the right to buy or sell a certain amount of goods at a predetermined price); that is, investment strategy chosen by the client, the success of which will depend on the quotes.
“There is a good chance that a number of companies write the percentage of profitability right out of head, and this is quite logical, as there is no control over how the insured's funds are invested, - says Aleksey Krichevsky. - Investments that bring 15-20% annually can be presented to the policyholder as a 5% return. Is a person without knowledge able to figure out how these products function and why such cases are generally possible? He probable isn’t”.
Moreover, the range of life insurance products has expanded greatly blurring the line between investment life insurance and universal life insurance. The short-term (3-5 years) accumulative programs with single premium have arisen, which is typical for investment life insurance. Regular contributions (monthly or quarterly) inherent in classic endowment are possible to find in ILI. ULI with additional investment income or ILI in installments is now available.
“ILI is a product just for our mentality: it promises an attractive return of 40-50% per annum not supported by anything plus free insurance, - says Anastassiya Uskova, CEO of Rocket Humans Group, ex-CEO of Rocketbank. - And people are happily buying into this, carrying their money without thinking why a windfall should be shed on them. And five years later, it turns out that for some reason the hopes have been in vain, and the return is tending to zero. This is not a deposit but an investment. They do not guarantee additional income, as in case the insurer's investments are unsuccessful, you can get much less at the exit than you paid at the entrance. And you cannot terminate the contract without loss. The regulator decided to deal with this last point. As a result, the range of investment instruments will become shorter and the number of potential complaints will decrease. That is what we need."
ULI and ILI are not deposits, and they are not covered by the bankruptcy protection of an insurance company. The initiative to introduce state guarantees has been discussed last year, but whether it will be introduced and when is not clear. “People can simply lose money by investing in a policy of an unscrupulous insurer, and the compensation will only be considered in the general line of the bankruptcy process, - explains Aleksey Krichevsky. - Therefore, the Central Bank’s wish to hold the sale of these products is more than justified."
The Bank of Russia will be receiving proposals and comments on the initiatives until February 15, after which it will become clear whether the insurance lobby has succeeded in softening the regulator's initiatives. To be continued.
Source: https://www.insur-info.ru/press/162499/
Photos are from open sources.
