Insurance industry: Long-term growth on trembling legs

The Unit Linked Insurance Plan (ULIP), a product providing a combination of insurance and investment, has been pronounced dead several times by the financial blogosphere in Hungary. Disproportionately high costs and aggressive sales methods have provoked negative headlines.

Now ULIP seems to be flexing its muscles again. As stated in the latest report by the Association of Hungarian Insurance Companies (MABISz), a major increase in unit-linked revenues in the second quarter of 2013 was behind an overall growth of 11% of the life insurance market to a large extent.

“The Hungarian life insurance market has been falling in real terms since 2007, but we have also witnessed a nominal drop in the past three years,” explains Attila Bosnyák, CEO of Consequit Group, an insurance broker company. “2013 might be the turn of the tide with revenues rising in two consecutive quarters and unit linked products accounting for 65% of total market sales.”

A bumpy road ahead
But popping the cork would be premature. “The life insurance market expansion in the first half of 2013 is primarily due to an ever increasing interest for single premium unit linked products,” Linda Sallai, ‎deputy CEO of product development and risk management at CIG Pannónia Life Insurance Plc highlights. A sudden jump of 36.1% on the single premium front may sound astronomic, but in reality it is rooted in the change of the macroeconomic environment. Dropping interest rates led to bank deposits losing their sex appeal and a rise in the financial transaction fee further pushed clients towards more profitable territories, where ULIP has handsome returns to offer for short-term liquid investments.

However, the large amount of money that was dumped with so much haste into the unit-linked segment may go as fast as it came. Steady economic growth, rosier employment perspectives and more disposable income would be needed for massive regular payments. None of that is in sight. “People have been seeing their real wages go down for years now. We estimate that a 3% decrease of real wages may trigger a plunge of 6-9% on the market,” András Kozek, deputy CEO for life and pension insurance at Allianz notes.

The market players place their bets on various factors in seeking to attract long-term investments in their ULIP sector. The role of a cost indicator enabling a comparison of unit linked products to one another and to other financial instruments could help. More innovative products offering an extremely low cost structure and the improved training of insurance brokers are also on the agenda.

Fancy an investment appetizer?
What ultimately may save the day for ULIP is the taxation issue. Returns enjoy major tax incentives in terms of the 16%-interest tax and the 6%-healthcare contribution, and under given circumstances a complete tax exemption is granted. On the other hand, whilst tax is due at expiry of any banking products or funds investments, switching between funds during the entire tenure of the unit-linked investment is fully exempt of taxes, allowing for flexibility and tax savings.

“Clients tend to lose their appetite for risk with every crisis and negative experience, and regain it slowly, but surely,” Bosnyák from Cosequit observes. It takes more than appetite to take a risk, though. “We need to make our clients aware of what they actually buy and for what purpose those products can be used exactly,” Kozek from Allianz says. CIG Pannónia expert Sallai adds that only such products that offers additional and special services or features have a future.

Creativity will be in heavy demand from ULIP sellers for certain, especially if you take a look at the recent report of financial watchdog PSzÁF on consumer protection risk. It states that revenues from new regular premium unit-linked contracts have dropped and so has the share of such contracts among new life insurance policies compared to 2012. Long-term growth for unit-linked products is still on trembling legs.

– Written by Levente Hörömpöli-Tóth