Growing regulation of financial products sales around the world has resulted in huge changes to the way such products are structured and marketed. Here, Paul Golden looks at one major product category in particular: unit-linked life insurance plans…
Concerns over commissions and conflicts of interest on the part of those selling unit-linked life insurance products continue to plague the industry, even as the providers of such products continue to go to what they say are often dramatic lengths to overhaul their products.
For decades, unit-linked life insurance products, such as offshore bonds, have been regarded as a standard wealth planning tool that advisers have adapted to suit a wide range of purposes.
This has been true in the onshore as well as offshore area.
Such products, because they effectively lock individuals in to a forced savings regime, typically enjoy a favourable tax treatment in many jurisdictions, because they encourage the idea of saving for one’s retirement, as well as because they can be used to preserve and, ideally, increase an individual’s wealth, as well as enabling them to pass it on to the next generation in a tax-efficient manner.
But recently, growing dissatisfaction surrounding the often hefty, and hidden, commission charges has taken its toll on the products’ image, as noted above. Regulators have also expressed concern about conflicts of interest regarding payments by asset managers to insurers, in an effort to promote the use of their investment products, such as funds and bonds, ahead of their rivals’.
In July 2016, the European Insurance and Occupational Pensions Authority (EIOPA) announced an EU-wide thematic review of market conduct among insurance companies operating in the unit-linked life insurance market. Participating insurance companies were expected to report back by September last and the results of the thematic review will be disclosed in the next few months.
What is “unit-linked” insurance?
Unit linked insurance, typically sold via a “unit-linked insurance plan” or ULIP, is a type of insurance product that enables the holder to combine an investment portfolio in a range of qualified investments (for example, equities, bonds and/or mutual funds) with the coverage of an insurance policy.
Among the advantages of such policies is that they can, depending on the investor’s country of tax residence, often be gifted to family members with a low tax burden.
Specific clauses can also be agreed in advance that have to do with controlling eventual access to the product’s investments by the investor’s beneficiaries, and to the timing and payment of tax.
The life insurance element, meanwhile, gives the client control over who receives their wealth when they die, as well as over the investments within the structure.
Finally, in at least one jurisdiction, Luxembourg, investors in insurance schemes with an investment element benefit from a special policyholder protection scheme set up for insurance companies operating out of the Grand Duchy, known as the Triangle of Security.
The EIOPA stated that the purpose of the review was to identify potential sources of consumer detriment stemming from the relationships between insurers and providers of asset management services.
In particular, it wanted to analyse how remuneration paid by asset managers to insurers could influence their choice of investments, and how this choice could impact policyholders.
According to the authority’s chairman, Gabriel Bernardino, it needed a deeper understanding of the monetary incentives and conflicts of interest that might be coming into play when insurers select the products’ underlying investments.
EIOPA has suggested that the development of the so-called “key information document” required under new EU legislation known as PRIIPs (Packaged Retail Investment and Insurance Products) would automatically address some of the consumer protection issues that have been identified with the sale of these products.
Meantime, it also acknowledged that unit-linked life insurance products experienced overall premium growth in the European insurance markets during the previous 12 months.
Demand seen in HNW sector
Jurgen Vanhoenacker, executive director of wealth structuring solutions at Lombard International Assurance, (pictured above), said his company had seen a steady increase in demand from a number of European countries. Based in Luxembourg and Philadelphia, Lombard International specialises in providing investment-linked insurance products for high-net-worth investors, and has been owned since 2014 by the US-based Blackstone private equity group.
“Over the last couple of years we have seen a significant pick-up in Italy, France, Portugal, Belgium and Scandinavia, as the high-net-worth community and its advisers have become more knowledgeable about the products’ advantages for wealth planning and asset protection,” Vanhoenacker said.
According to Vanhoenacker, the fact that other insurance solutions with a guaranteed rate of return (such as Fonds en Euros, funds held by life assurance companies, where the return is usually based on government bonds which the insurer purchases when it invests its clients’ money) have become less attractive has helped the sale of unit-linked products like Lombard International’s in France and Italy.
“Outside Europe, we see strong interest in many Latin American markets, and in the US, where these products are respectively referred to as ‘private placement life insurance’ and ‘variable annuities’,” he added.
Asian interest: AXA
Combined protection and unit-linked insurance products are also gaining traction in Japan and other parts of Asia, including Indonesia and the Philippines, according to AXA Global Life unit linked governance manager Maxime Gaignault.
Peter Hamilton, a director at Zurich Insurance Group (left), concurred with the view that unit-linked life insurance entities had a place in many individuals’ portfolios across Europe and the US.
However, he noted that the fact that these products’ premiums are reviewable was often a disadvantage, because, when the assets held within them fail to return as much as expected, premiums can be forced to rise.
“In the UK, the trend has been away from unit-linked life assurance, towards guaranteed premium plans, with a focus on the certainty that this provides,” he noted.
Conflict of interest issue
The potential for a conflict of interest to exist in the relationship between the insurance companies and the asset managers – since it is the insurance companies that choose which asset managers’ investments their products are to contain – is one insurance company executives sometimes seem weary of being asked about.
“We strongly believe that every service provider should be able to clarify and justify its fee for the benefit of the investor and policy holder,” said Vanhoenacker.
“Lombard International Assurance has fully embraced the transparency measures outlined by the PRIIPS regulation and is taking a leading role in its implementation,” he added.
Other providers state they have also taken steps to ensure transparency.
Among them is Arnaud de Dumast, chief executive of Neuflize Vie, a joint venture between ABN Amro and AXA Life France, who said his company recently decided to introduce “inducement-free life insurance discretionary portfolio management”.
“This will prevent any conflict of interest, if and when the client gives a mandate,” he explained.
“And if there is no mandate, then we can disclose full transparency on inducements.”
For those looking to save for their futures, the continuing low-interest rate environment is a problem, because it means that simply stashing one’s savings in a low-risk, interest-bearing account isn’t good enough even to keep up with inflation.
As long as that situation remains, AXA Global Life key account manager France Germani noted, echoing the comments of a number of his colleagues in the industry, investors will be seeking out low-risk, long-term savings and retirement products that actually generate returns, which unit-linked insurance products do.
“We therefore welcome the decision of pension authorities to work with insurers on setting up strong foundations for this strategic business, and believe that insurance companies should be fully transparent regarding their funds selection process,” she said.
Hamilton, meanwhile, believes EIOPA’s decision to review the unit-linked life insurance market, far from a negative, is actually a welcome development.
“It is important that customers and advisers understand all the issues – including the risks and charges they face – to enable them to make appropriate decisions,” he said. “If a review improves that, it would be a good thing.”