Investment insurance demonstrated a record-breaking increase in premium income: 50 billion rubles in 2015, 110 billion rubles in 2016, about 150 billion rubles within the first nine months of 2017. This market is considered to be the fastest growing financial sector.
Banks actively offer investment insurance as an alternative to deposits, rates of which are lower. Depositors transfer funds to ILI policies, which work as life insurance and at the same time allow earning extra income by investing of customer contributions on the stock market.
By the end of the policy term, the insurer is committed to return only the contribution itself and does not guarantee any yield.
The potential yield of ILI programs may be higher than that of deposits. Wealthy investors buy the ILI as a protective tool with additional earning. The customer can record the interim profit in the event of market conditions change; many insurers provide an opportunity to withdraw it, saving the initial payment. The policy is not considered as a property; the income received under it shall not be declared, if it does not exceed the average weighted rate of refinancing for the entire insurance period. Earnings from ILI are not the subject of disputing in the courts and cannot be withdrawn by third parties. In the event of divorce, property division or claims making by business partners or creditors, the investor will receive money in full.
But there are serious problems in the market.
Under bank’s wing
It is customary to link growth of the ILI market within last three years with sales activation through a bank channel.
It is profitable for banks. Up to 80% of customers' funds received as payment for policies can be deposited in the bank itself. The bank in fact gets liabilities, for which it does not pay contributions to the Deposits Insurance Fund. This practice is widespread, especially in the terms of long-term partnership between the bank and insurance company.
It is hardly a surprise that over the past year or two captive insurers of almost all major Russian banks entered the market.
Fee-based income from policies sale attracts banks as well. If in 2015 the fee of the bank for sale of three-year policies amounted to 5-7% of contributions, but now the fee for 3, 5 and 7 years products reaches 11-15%. The fee for banks is formed by surplus profit in formation of a reserve, which, like the choice of instruments, is the insurers liability. Rates of fixed income instruments depend on reliability of the issuer: the lower its reliability, the higher the yield of the instrument. To date, some insurers' investments in low-quality assets have become a key risk for the industry.
High fees encourage banks to increase policies sales, often incorrectly presenting the product and withholding the risks. The policy sold in this way often deceives the customers’ expectations, and subsequently the insurer can hear: “I was promised a guaranteed yield more than the deposit rate and in 3-5 years it turned out that the funds were wasted because the market collapsed”.
Since 2015 to 2017, availability of the product has increased due to the banks. The minimum amount in bills for the ILI programs was decreased from 300 000 to 50 000-100 000 rubles, and it allowed banks to cover a large, little-informed about investment products contingent. This could affect the reputation of the market and the quality of the client portfolios of insurers.
What does the regulator worry about
It is not surprising that the Bank of Russia is preparing for influx of customers’ complaints, disappointed with the results of investment insurance in such circumstances. Aggressive sales of the ILI through banks, according to RAEX agency (Expert RA), led to a number of additional risks for the market. The lack of information regarding returns on ILI policies, the customer’s lack of understanding of the product upon purchasing as well as probable changes in the regulation of this segment are among them and all the above mentioned factors can significantly change the dynamics of life insurance and the entire market development in 2018 already.
As it is stated in the consulting report of the regulator, it intends to ensure that the investment life insurance is no longer confused with bank deposits, and pay closer attention to correctness of policyholders informing about the ILI, as well as to the necessary level of specialists’ knowledge, who offer insurance programs.
Appraisal of insurance agents, including employees of the agent banks and employees of the insurer, is introduced. Responsibility of insurance agents and employees of the insurer for failure to meet the certification requirements will be applicable.
Information disclosure will be standardized. First of all, the new standards will affect banks, which sell ILIs as agents. The Central Bank intends to amend the legislation and impose on the intermediary the same obligation regarding information disclosure, as to the producer of the financial product.
There are plans concerning disclose of the size of bank fees. The regulator is aware of who and what fees pays, but this information does not appear in the customer’s agreement, it is "sewn up" into the conditions of reserves allocation.
With a view to the future
Transformation may take up to two years. Until then, we have to hope that the wave of customers leaving the market in the next year will not prevent its further development.
The fact is that the final profitability of policies sold before 2015 and expiring this year, according to our estimates, will be zero or slightly ahead of the inflation rate, but will not reach the profitability of bank deposits. Four to five years ago, the basic assets in the ILI programs were mainly the price of gold and the RTS index, which decreased significantly within this period of time.
The customers, whose expectations will not be justified, will likely choose other, more conservative, strategies and tools to invest the remaining funds as the result of insurance investment.
Investors, who purchased ILI policies after 2015, can have more confident feeling. Starting from 2014, insurers have begun to change investment strategies and instruments gradually. Now they have switched from direct purchasing of basic assets to an option-derivative security, which allows taking into account the difference between the initial value of the asset and its price as of the insurant’s time left to live. The terms and condition of the option are tied only to the end date of the policy, the difference between purchase and sale price of investment instruments, revaluation of currencies. For example, three-year policies purchased after 2015, for which payment deadline is now suitable, provide returns of up to 10%.
Customers’ satisfaction with the earnings received will be the key factor determining the future of the ILI. Expansion of product lines, development of the new investment strategies and remote services for customers, both in purchasing of the program and in after-sales service, the regulator's initiatives to increase transparency of this type of insurance - all the above mentioned should serve to ensure that total returns under the ILI will be more attractive than deposits and will positively affect the further development of the segment's dynamics in the future. Then high rates of life insurance growth can remain within the coming years.
The potential of the market is great. In Russia, the share of life insurance premiums in general insurance market fees is 12.7%, while in Western Europe - 60.5%, Central and Eastern Europe - 28.9%, in emerging markets - 52.3%. The share of "life" in Russia's GDP is only 0.161%, and all over the world - 3.47%.
The opinions of banks’ experts, financial and investment companies presented in this section may not coincide with the opinion of the editors and are not an offer or recommendation for purchase or sale of any assets.
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