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Cash-value insurance: a perspective from Canada

Almas Rymov, having worked in Kazakhstan in the insurance industry for more than 7 years, since 2011 is an employee in one of the largest insurance companies in Canada - Sun Life Financial. The number of employees in this company is about 27 000 people (without insurance agents) and the total amount of assets under management exceeded 700 billion dollars. Sun Life has subsidiaries in more than 10 countries and is included into Fortune 500, the list of world’s largest companies.
Cash-value insurance: a perspective from Canada

During the first two years he worked with Sun Life in Toronto which coordinates the largest subsidiaries in India and China, and since 2013 he has been working in the Asset and Liability Management Department in the Canadian segment. Almas shared his observations of the Canadian insurance market.

“Studying life insurance markets in Canada, China and India, you begin to understand that the design of insurance products is dictated by the demographic, economic and cultural factors present in each country. In India, “long-term” cash-value insurance products with a term of 10 to 30 years are popular, in China – “short-term” cash-value insurance products with a period of 5 to 10 years, in Canada, policies with a term of more than 10 years or cash-value insurance policies are popular. 

For myself, I have identified cultural differences in these countries: in India, since 1955, there is a state insurance company that exercised the monopoly right to sell insurance products. It was this company that taught Indians to believe in insurance and buy products with a long period of validity. In China, life insurance has developed relatively recently and competes with banking products, therefore policies are basically reminiscent of short-term deposit products of a bank.

In Canada, the demographic factor is strongly felt - the share of the population of retirement, the so-called “Baby Boomers”, i.e. the generation born in the baby boom period in post-war years, is growing rapidly in the country. Because this demographic group has accumulated significant savings, the major emphasis is placed on the pension component in cash-value insurance products.

Unit Linked Insurance

What can be applied in Kazakhstan from the experience of these countries? Which products of insurance would be interesting for the Kazakhstan market? In my opinion, cash-value insurance is the direction where life insurance in Kazakhstan can see most dynamic development.

From various versions of cash-value insurance, I would like to focus on cash-value insurance with an investment component, i.e. Unit-Linked or UL products.

These products have several features:

  • In essence, UL is similar to an investment made in a mutual fund, from which a certain percentage is deducted monthly to cover the company's insurance expenses.
  • The policy holder is given a choice of instruments for investment where:
  • Profitability is tied to the stock index, for example, to the American S&P 500, the European EuroStoxx 50, the Japanese NIKKEI, Kazakhstan's KASE index, and so on.
  • Profitability is fixed and depends on the term, similar to a bank deposit.
  • Profitability is tied to the index of corporate or government bonds.
  • Funds are invested in a specific mutual fund, for example, in Ishares or Vanguard funds.
  • Combination of the abovementioned options with the possibility of changing the proportions in the invested funds at any time.
  • The insurance amount is either equal to the value of the investment in the fund, either fixed or equal to the maximum of the previous options.
  • In case of early termination, a certain percentage is withheld from the fund's balance for the first few years.

Why are UL products popular in Canada? First, it is beneficial from considerations of tax savings. Personal income tax in Canada is very high and reaches more than 40% above 120 thousand dollars a year. If client receives a salary of more than 120 thousand dollars a year, then it is profitable for such a client to buy cash-value insurance with a maturity running after retirement, because when retiring the accumulated investment income will be taxed at a much lower tax rate (for example, 20%).

In the event of client’s death, the investment income will be paid in the form of death payment and will not be taxed. For clients with savings, let’s say, over $1 million, this can be a significant saving on the tax. Secondly, the client does not need to make frequent investment decisions. Having chosen the funds for investment once, the client may not worry about the funds for a long time.

Prospects in Kazakhstan

Based on sales experience in emerging markets Unit Linked products are popular with a fast-growing financial market for customers willing to invest in equity funds. It also seems promising to invest UL funds in dollar indices.

The only obstacle in the path of UL products is the imperfection of the insurance legislation of Kazakhstan where an insurance company cannot build up a significant portfolio in this kind of cash-value insurance because of the requirements for prudential standards.

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