Another advantage of unit-linked is the absence of taxation on the increase in value of instruments traded on the external market, since the investment return is equal to the insurance payment. “Prime customers entered the new product first. In the first year, the minimum investment amount was $1,500-2,000, while on average, clients entered with $45,000”, - says the director of the sales and regional development department of Nomad Life Ramai Kurbangaliyev.
A guaranteed return is accrued on 10% of the money received from the client. This part of funds lies in the provision of life insurance payments. The remaining 90% of the money are not guaranteed returns. It turned out that in the conditions of the strongest storm in the stock market, clients are not ready to take risks on the non-guaranteed part, but they do not want to leave the stock market either. Within six months of 2022, the company has recorded a decrease in premiums on ZNI, but the premiums on accumulative Zoloto Nomadov with a guaranteed return have grown by 46% over the same period.
“The stereotypes of Kazakhstanis are such that if they do not see growth, they make a choice in favor of a guaranteed return. We see that in total there is more money now under the ZNI and Zoloto Nomadov programs. The customers are ready to sacrifice a higher potential return in favor of the guaranteed one that we provide in Zoloto Nomadov”, Kurbangaliyev notes.
The stock market volatility observed since the year beginning did not affect the change in the guaranteed return on this product. It can range from 1.5% if the insurance contract is concluded for 18 months, and reach up to 3.41% if the contract is concluded for 15 years. Nurbek Abzhanov, director of asset management and accounting at Nomad Life, explains that no changes have been made due to the fact that dollar-denominated assets, i.e., investment-grade fixed income bonds, are secured to fulfill the guarantee. They have volatility in the short term, but “as our assets and liabilities have a similar maturity, the risk of volatility is leveled.” If the client entered the product for three years, financial instruments with a yield higher than obligations are bought for this period in order to pay a guaranteed return to the client in three years. It makes no difference to the company how the stock floats within these three years; it fixed the profitability when buying securities. Besides, Nomad Life has a large capital (24 billion tenge, assets of 243 billion tenge as of early July 2022. - Ed.), which can swallow investment risks, Abzhanov said.
Nomad Life invests clients’ funds in stocks, bonds and exchange-traded funds. The latter is the core of the ZNI product. ZNI is a passive asset management within the proposed range of portfolios, the main purpose of which is to follow a certain index. One of ZNI's portfolios includes exchange-traded funds that replicate the S&P500 index. The list of companies included in it is not static. The index provider updates the weights of each stock and the composition of the index quarterly keeping the best-performing companies.
Abzhanov believes that crises are the best time for LICs, the size of capital allows them to buy instruments “at the bottom”. “We were waiting for the rate increase and kept some of the funds in cash. Now, the rate on purchased investment-grade fixed income assets is 5-6%, which is higher than on liabilities. The company earns on the difference in rates between assets and liabilities, and capital grows accordingly with income,” the source clarifies.
While appetite for risk recovers, the LIC expects new client adds. “We see an increase in interest in Zoloto Nomadov, because the events of the 1st HY showed how risky it was to keep money in banks,” says Abzhanov. “As for ZNI, a reactivation of it is possible after positive shifts in the stock market: clients who are now holding back from purchasing the program are becoming more active.”
Guarantees are always highly valued
It is curious that, despite the visible advantages of unit-linked such as tax preferences, high capitalization of LICs, which makes it possible to subsidize this product at the initial stage (the total assets of nine LICs as of early June 2022 amount to 788 billion tenge against assets of 1.1 trillion tenge 18 general insurance companies), as well as sharing the risks between clients and LICs through keeping client funds separately from the LIC money, unit-linked has not been included in the product basket of large LICs.
LIC Halyk-life (252.4 billion tenge of assets) has informed that, given the volatility of the market, the company is carefully preparing for the sale of unit-linked and pays attention to the development of after-sales service for customers. “Given that the product of investment life insurance should be as flexible, convenient and at the same time technologically advanced, this issue requires careful consideration. The company is considering all the risks associated with the release of this product,” says Andrey Dzheksembayev, Deputy Chairman of the Board of Halyk-Life. The Board Chairman of LIC Freedom Life Azamat Yerdessov (110.9 billion tenge of assets) says he plans to launch unit-linked after the implementation of a number of “new unique products for a wide range of customers.”
Both companies are now more focused on classic life insurance products. Dzheksembayev noted that for the five months of 2022, an increase in premiums (+1% compared to the same period in 2021) was recorded in both product groups: endowment life insurance and insurance of loan borrowers. The interlocutor notes that the demand for the endowment insurance product depends on the improvement of its consumer properties, although, “the situation both in the domestic and foreign markets has had a huge impact on all citizens of the country, forcing them to change their attitude to life and money.” For the five months of 2022, Halyk-Life recorded an increase in endowment life insurance contracts by 1,682 units compared to the same period in 2021, 70% of the total number of concluded contracts were the 15-year term agreements.
The Halyk-Kazyna universal life insurance program with a guaranteed rate of up to 3.52% in foreign currency depending on the term of insurance is one of the most popular products of Halyk Life. Despite the dollar volatility at the year beginning, “the product is in demand, it maintains sales dynamics similar to last year.”
According to Yerdessov, in 2022 endowment life insurance has become one of the most dynamically developing and popular life insurance products among the population, especially after receiving tax benefits. Accelerated digitalization contributed to dynamics: accumulative programs that allowed concluding contracts with a client online on the insurer's website appeared. But the events of February and March affected potential customers most sensitively: “When the dollar rose sharply against the backdrop of geopolitical events, people became more interested in endowment life insurance programs indexed to the dollar.”
“When choosing endowment, the client wants to simultaneously save up, receive income from his savings and be sure that in case of insurance event, his family (heirs) will have a financial cushion,” the source notes. Freedom Life now has two flagship products: the Freedom First program with savings income of up to 2.76% in dollars for up to five years, and Freedom Capital with annual interest rate of up to 4% when concluding a contract for up to 10 years.
LICs uninterruptedly remind that products with guaranteed return are an alternative to foreign currency deposits with their rate equal to or below 1% per annum. They also list other preferences such as failure to confiscate or arrest funds under endowment insurance programs and non-distribution of third-party claims due to the fact that the funds are legally related to life insurance.
The products with guaranteed return in terms of their options become as close as possible to deposit. In addition to the initial insurance premium, additional contributions that increase the accumulated amount are provided, and from the second year it becomes possible to receive a partial payment of savings. “By developing programs with different conditions, we provide the consumer with the choice of the most optimal savings option for him, both in terms of insurance terms and remuneration rate,” says Yerdessov. It is critical, according to insurers, to simultaneously improve the financial literacy of the population. According to Dzheksembayev, the primary task is to explain that accumulative products with guaranteed foreign exchange returns during a period of volatility just show their primary qualities - accumulation and insurance protection.
What about unit-linked?
The former executive of Nomad Life, expert Kairat Chegebayev when noting the prospects of investment insurance in view of preferences received from the state, clarifies that unit-linked is tied to stock market indices. And while the market is unstable, the product results are also unstable, but “there are two aspects, however, that need to be mentioned.” Firstly, the longevity of the product, that is, temporary fluctuations, should not stress out the client, although, “human psychology is such that this is not that easy to stay calm.” Secondly, according to Chegebayev, falling markets are a good opportunity to enter the product, as this will allow get significant profits when the market grows in the future.
According to the interlocutor, when forming an investment portfolio within the framework of the investment declaration, LICs have room for financial maneuver. Managers develop protective investment portfolios to give the client the opportunity to ride out fluctuations in the stock markets. Given the current stock market storm, according to Chegebayev, LIC marketing should be strengthened in terms of understanding the stock market and customer behavior. “Insurance company’s knowledge and competence should be focused on working with a client individually, in most cases it is client training and related assistance in choosing investment strategies,” the source explains.
As CEO of the life insurance company, first to launch unit-linked, Chegebayev expresses his point of view on why this product is not spreading on the market. There is a number of features associated with lack of competence, since the product is new and requires not only significant automation of processes, but also the study of all other issues, such as sales techniques, the variety of investment portfolios offered to meet the needs of any client, and much more. Often only large companies can afford to have such highly qualified personnel.
According to the interlocutor, the problem is intragroup competition among products. If a financial group has a management company that offers mutual funds and other products that have no tax benefits, then the unit-linked offer will, to a certain extent, discredit other products of the group. Another point is related to the fact that there are large fixed costs when launching a product. If you do not gain the proper portfolio volume, the product may become “difficult” for the insurance company, it will not be possible to close it immediately, since the contracts are long-term, and given that the sale and support of such a product is not an easy task, companies may not decide to take this step. However, there are no investment risks for the LIC, since the client himself assumes all risks when choosing investment portfolios.
Photos are from open sources.
