Insurers have long been waiting for the emergence of a regulatory framework that will allow Unit linked to be introduced into their product lines. In my opinion, shared life insurance can boost the development of not only investment life insurance (ILI), but also the emergence of qualitatively new products of accumulative and pension insurance, and, accordingly, a source of "long" money in the Russian stock market.
How the Unit linked might look in Russia? According to foreign practice, this is a product that differs from accumulative insurance (and ILI) in that the insurance amount can be determined by the asset value (which is not yet allowed by the Russian legislation). In this case, shares of a certain fund, or ETF, or shares/bonds directly can be units (assets). Hypothetically, any liquid or quoted asset can be a unit.
That is, for example, your payment for an insurance event amounts to three units at their cost at insurance payment date. Now the insurance coverage is provided by the insurance company. Thus, non-payment of the insured amount can occur only in case of the insurer’s default. In Unit linked, the insurance coverage is tied to a specific asset. And that is where the new opportunities for the market and customers are, as well as the risks for both parties.
What are these opportunities, and why do I believe that Unit linked can be a stimulus for the development of not only the insurance market, but also the entire stock market of the Russian Federation? It is not a secret for anyone that there is a problem with “long” money in our country. And the problem is not only that investors are not willing to invest for a long period, but also that there are not so many real tools for this. I am not talking about stocks/bonds, as I am confident that the majority of Russian investors are not yet financially literate enough to independently form their savings and construct investment portfolios.
At the current level of investment discipline development, we need investment products aimed at obtaining long-term capital gains under the specific goals of the investor, such as universal life insurance, voluntary retirement programs, etc.
The weak side of these products is in the absence of a transparent way to determine investment returns, as well as the high cost of guaranteed returns from reliable players in this market. The long-term products have a fixed rate, which the company can provide in case of any scenario. It may be few times lower than current long-term rates, and not because the companies are greedy. The spread between the actually earned and guaranteed rate included in the product is received by the client. This is necessary for the financial stability of companies. When a few years ago in Europe, the monetary policy had been moderated and the bond rates in some countries turned out to be negative, this became a serious risk for insurance companies.
However, the profitability is not transparent; the client cannot assess what it will be, as he does not know which benchmark the company's portfolio is tied to and what it belongs to.
Unit linked solves this problem. In Unit linked, the client will initially see what assets increase his savings, and in case the profitability is not high enough, he will be able to see the cause and change his asset. At the same time, Unit linked will retain the advantages inherent in life insurance products: risk coverage, tax concessions, and a special legal status. Various portfolio solutions (personal portfolio planning, robo-advising, etc.) are gaining more and more popularity today, and Unit linked can be an ideal platform for such products implementation.
On the other hand, the implementation of Unit linked is also associated with risks. A client, having acquired a savings product of an insurance company, can be sure in his investment safety, if he is satisfied with the credit risk of the particular insurer chosen. But in Unit linked it is possible to make products more risky than the credit risk of the company itself, for example, by making a product secured by a bond with B rating or lower, for the risks of which the insurer is no longer responsible. The reputational risks and misspelling are hidden here. If Unit linked is allowed in Russia, these issues will require very thorough study and resolution.
Author: Boris Borzunov, Head of Investment Strategies, Sberbank Life Insurance
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