Alexey RUDENKO, CEO, SBERBANK Life Insurance
Alexey RUDENKO: In 2017, double-digit growth rate of the Russian life insurance market was achieved firstly thanks to investment insurance products (Investment Life Insurance). The ILI segment totalized, according to our estimates, more than RUB 210 billion, i.e. more than 60% of the market. Mainly this was possible due to low interest rates on deposits, which made investment life insurance a more attractive instrument.
In 2017, the GWP of SBERBANK Life Insurance exceeded RUB 102 billion, of which over 60% - investment life insurance, about 15% - individual risk and saving products, and almost 25% - credit life insurance.
SBERBANK's sales network had the primary contribution to this success. Another factor of the rapid growth was our ability to design and implement a balanced product portfolio.
Thus, in 2017 SBERBANK Life Insurance became the first Russian life insurer to enter TOP-2 of the general insurance market.
XPRIMM: Investment life insurance provided for more than a half from the reported premiums - what are the competitive advantages that are determining customers' preference for these products? Also, please explain what are the main features differentiating these products from the classical investment life products known as Unit Linked life insurance?
A.R.: European analog of ILI is unit linked; which by the way became very popular. However, ILI, if compared to unit linked, is by nature a traditional life insurance policy, but with a special mechanism for distribution of investment income. Therefore, ILI includes an absolute guarantee of investment protection - at the end of the contract the customer receives initial amount regardless of the situation on the financial markets. Also, the customer has a possibility to choose between various investment strategies and to actively take part in profitability of international capital markets.
Thus, ILI program is a tool for comfortable acquaintance with investments in the stock market, a kind of transition from a conservative deposit to risk investments. For people who never invested, except for deposits, and started placing their funds in complex tools, buying products without capital protection could turn out to be too risky.
XPRIMM: Are there any fiscal incentives encouraging customers to choose this type of product?
A.R.: ILI is a unique tool in terms of tax optimization, because it combines both types of tax benefits: tax deduction from the amount of investments and tax benefit from paid investment income. Other financial tools in the Russian market, as a rule, have only one of these benefits.
Under tax deduction a Russian ILI customer has the right for return to be reimbursed with the previously paid personal income tax (13%) within the tax base of RUB 120 thousand. In terms of the tax benefit from the income under ILI program, a person benefits, in a certain percentage, from the reduction of the taxable base on income.
ILI in Russia is growing rapidly even considering that the volume of tax incentives is not at the level comparable to one in developed countries, moreover, it has not changed for many years, even considering the inflation.
Today, our insurance community stands for further development of the tax incentive, which will further foster the ILI segment in Russia. We consider it necessary to raise the base for calculating the tax deduction from RUB 120 thousand to RUB 500-750 thousand. By the way, 500 thousand rubles - this is currently an approximate average income of ILI products sold by us.
Also, another advantage of investment insurance products is insurance coverage for risks of death and accidents - here we have a great potential for program completion with additional insurance and service riders. In case of any insurance event when the beneficiary receives payment under ILI agreement then he/she is not obliged to pay a personal income tax, same as in case of traditional life insurance policies, and wait six months for inheritance. Another distinctive feature is legal protection of investments which allows, for example, to transfer the capital by succession on a one-time basis.
XPRIMM: What kind of investments portfolios do your customers usually prefer and what is the average maturity of your investment life insurance portfolio?
A.R.: The ILI market in Russia began with algorithmic strategies that assumed constant or dynamic leveraged participation in the most popular investment assets. In the Russian market they included undoubtedly the stock RTS index of blue chips and gold. One of the first implemented market strategies was the so-called CPPI (Constant Proportion Portfolio Insurance).
After the volume of ILI market started to increase the next step was to establish a partnership with leading international investment banks in order to have the possibility to purchase various options of a wide range of basic assets: share markets in different regions, HighTech investment, commodity markets, FixedIncome tools diversified by countries and sectors, real estate funds, etc. A classical form of additional investment income distribution was sharing ratio which is applied to profitability of a basic asset. Regardless that most insurers offer their clients participation in growth, we had some examples when the strategy relied on fall of a basic asset.
Then insurers began to offer more exotic forms of participation in investment income. Those included strategies with price averaging effect, with regular coupons, payment of which relates to event instance, with or without a storage effect.
However, some companies found their niche in offering of actively managed investment strategies. As a rule, such strategies are made in partnership with a "related" management company. In this case, management takes place within the investment declaration. Such products are less transparent to a client in terms of formation and calculation of investment income.
ILI products in Russia are designed basically for a 3-7 years' period. This is a medium-term story, close to deposits rather than products of traditional life insurance, focused on long-term savings (for example, for education of children or retirement). The main demand for ILI today comes from clients nominally referred as to the Russian middle class. Usually our customers on this segment are 45-50 years old with available savings of about RUB 1 to 3 million. These are customers who often either do not have at all or have only small experience of dealing with non-banking products.
XPRIMM: How would you comment on your clients' investment risk appetite? Also, for those preferring a guaranteed result, how costly is the guarantee?
A.R.: In Russian Federation there is a very different situation with income rates on the Fixed income market. While European rates often make up 0-1%, in Russia the largest banks' rates fell below 6%. As a result, we have this difference of the demand from customers, who still prefer guaranteed products instead of ones that potentially have a risk of losing. In this regard ILI is the tool that meets challenges of the time - a high level of perceived inflation (10-12%) against declining deposit rates (in January 2018 they dropped until historically minimal level of 7.12% and continue to decrease to 5 %).
Under ILI a client receives both an opportunity to beat the above-mentioned inflation and unconditional guarantee of investments. Given the low level of investment products' penetration in the savings of customers, ILI, as I said, is the best tool for people who make their first step on the investment market.
XPRIMM: What are the main distribution channels of investment life insurance?
A.R.: On the Russian market, about 95% of ILI sales are made through bank assurance channel. Traditionally, a bank is an organization, familiar to every Russian citizen, where he/she comes to solve any financial problems. One could say that exactly when he interacts with the bank's service manager he become more receptive to information regarding his personal finances. Besides that, nowadays banks use more often the personal financial planning approach, shifting the focus from offering a separate product to making a complete portfolio. Another advantage of banks is, as a rule, wide representation in different parts of the country, while most insurers do not have such distributional networks. The channel of bank assurance will definitely prevail in the future.
XPRIMM: In the previous year, the Bank of Russia has cautioned the public about the risks associated with investment life insurance (at the begging of 2018 a large number of such contracts expired) and that there is no state guarantee on these insurance policies unlike for bank deposits. How do you comment on this situation? Are there any safety measures in place to protect customers' assets invested in such products?
A.R.: Insurance companies are not included in the system of state control over deposits. Nevertheless, there are powerful mechanisms for increasing of life insurance reliability, in particular, control over insurers' financial solvency, high capitalization and balanced distribution of investments. During all the Russian life insurance history we had no cases when clients did not receive payments due to an insurer's bankruptcy, and when 2 companies - ING and Fortis - left the Russian market, their portfolios were transferred to Allianz, which assumed the responsibility to fulfill its obligations to customers.
I'd like also to emphasize that the main problem, often discussed by the Bank of Russia, is necessary improvement of ILI bank sales quality in order not to make customers confused between this alternative financial tool and deposits.
Today, life insurers are actively working on ILI standard - this is a product standard and a disclosure standard. A client should be informed that profitability is not guaranteed, that earlier termination of the program is not possible without losing a part of the contribution and so on.
SBERBANK Life Insurance is successfully using its own tools - each ILI contract is accompanied by a clear and understandable memo for clients, and since 2016 we've been providing a welcome-call service for all investors who purchase ILI at SBERBANK. Our managers call around and quiz new customers to make sure they understood the product correctly. Otherwise, according to the law, customers have 14 days of so called "cooling period", during which they can terminate the contract and take their contributions back without loss.
XPRIMM: Do you consider that the edge for investment life insurance was achieved or we are still on the growing path? What are the other products/segments which you see developing in the forthcoming period? Are consumers interested in such products?
A.R.: ILI is a segment with a huge potential. For example, penetration degree of investment and traditional life insurance products into the deposit base of SBERBANK (and this is the country's largest bank) is from 2 to 9% depending on the clients' segment, while in the Western developed countries this figure reaches 50%. Well this is a huge space for growth.
We also expect an increase of the investment life insurance penetration due to the new legislation on unit-linked, which will allow us to offer new products without guarantee in the context of falling rates. The source for potential growth is the inclusion of life insurance in the new pension system, where insurers could become operators of voluntary pension savings along with non-government pension funds. This will make ILI more attractive for customers allowing insurance companies to offer combined products in the form of pension savings, insurance protection and variable investment strategies.
Another priority of our company for 2018 is traditional life insurance with regular contributions. This protective tool is interesting mainly for a mass segment of customers who are close and familiar with regular savings in time, tax benefits and financial discipline. Also, we rely on saturation of our products with additional services and riders, including medical ones: telemedicine, check-ups, second medical opinion for diagnosis of critical diseases.
XPRIMM: How would you describe the initiatives of the SBERBANK Life Insurance to digitalize its business? Are there any InsurTech initiatives programmed in this regard?
A.R.: SBERBANK is famous for its convenient mobile application which has been among TOP-4 applications already for 2 years for iPhone by number of downloads in Russia along with such world-known ones as WhatsApp and Instagram. Today, "SBERBANK Online" provides clients with data on balances on deposit accounts, bank cards, information on existing loans, but no data on investment-saving life insurance products yet. We plan to implement that data into the SBERBANK mobile application soon, and thus clients will be able to see their entire structure of financial portfolio.
XPRIMM: What is your forecast for the life insurance market overall in the market, till the end of the year?
A.R.: We forecast growth. I repeat that the potential of investment life insurance is far from being exhausted - in Russia deposits make about 60-70% of citizens' savings, while in OECD countries life insurance tools, non-state pension insurance, stocks and bonds have a much larger share. I am sure that investment life insurance in 2018 will continue to be the main driver of the market growth.