Ten years ago no private bank in Asia offered life assurance. Today, most private banks lay claim to a broad range of client-centric wealth management services that include life assurance of one form or another. What has changed? Why has an industry that traditionally remained aloof now decided to join the fray? And why does the high net worth industry in Asia appear to favour products that investors in more developed markets have already turned their backs on?
A brief review of the evolution of life assurance may assist.
Term life assurance
Term life assurance, the original and pure form, was first developed to provide financial protection for dependants in the event of an early death of the family breadwinner. It still remains the cheapest form of life assurance. Term assurance will only pay-out if the life assured dies within a specified term of years, or before attaining a predefined age. The majority of term life policies never pay, either because the life assured outlives the term, or because the policy is terminated early, the reason for its initial purchase having been overtaken by events.
Although life companies often provide a range of term life products with choices of riders and benefits, term products always involve the payment of regular premiums - monthly, quarterly or annually - and a policy will continue for the entire term provided that payments are kept up-to-date. If a policyholder no longer requires the policy, perhaps following a significant inheritance, or a fortunate windfall, payments can be stopped, and the policy will immediately terminate.
Although low cost, the big disadvantage of term assurance is the fact that a policy will pay nothing if death occurs after the specified date. Or if the policy is terminated early. It has no investment value. Families therefore began to seek more permanent forms of life assurance; policies that would payout on death regardless of when it may occur. The introduction of estate tax reinforced this need, with families not only requiring protection against a possible early death of the breadwinner, but also protection to help pay estate tax without having to sell the family home, the family business, and the jewels. Whole-life assurance policies were consequently born.
In very simple terms, a whole-life assurance policy is little more than an everlasting and annually renewable term assurance policy. As long as regular premiums are paid, the policy will continue, and will eventually payout on death. Unlike with term assurance, however, the life company generally expects to payout on death. Costs are therefore much higher for whole-life than for term life assurance.
Whole-life is not, however, "pure" insurance, and there is an investment risk lurking within most whole-life products.
A whole-life policy always includes an element of investment, and a portion of each premium paid during the early years is invested by the life company to build a sufficient "pool" to fund premiums paid in the later years. This is true regardless of whether the product involves regular premiums or a single premium, and this is why a whole-life policy will always have a "cash/surrender value"; the sum that will be repaid if the policy is terminated early.
The danger is that if the investments fail to grow sufficiently, and as projected, the policyholder will be required to pay additional premiums at some time in the future to ensure the policy does not expire worthless before death. Many HNW investors only recently introduced to life insurance are blissfully unaware of this risk, which is more acute when the highest level of death benefit is requested for a single fixed premium.
There are unfortunately many examples of investment returns failing to meet initial projections and expectations, requiring policyholders to make additional payments to keep policies going. There have also been too many instances of life and pensions companies failing to honour guarantees.
Investment performance and transparency
Against a backdrop of an extended period of high inflation and double digit investment returns, owners of whole-life insurance policies began to question the poor investment performance of the life companies, and to criticize the complete lack of transparency. Investor experience with specialist investment companies, asset managers, and fund houses brought a realization that the life companies were not necessarily the best choice of asset manager.
Unit-linked, or investment-linked, life assurance was born. Products were developed that enabled policyholders to exercise more choice and more direct influence over the manner in which the surplus within a life insurance contract was invested. Today an adviser has access to a proliferation of modern investment-linked life assurance contracts, many of which have been designed with high net worth families in mind, with investment choices that meet the needs of sophisticated investors, and with appropriate and transparent charging structures.
The Asia phenomenon
And so to our initial question. With an array of modern international products available, and with domestic insurers throughout Asia now offering sophisticated investment-linked solutions, why has the regional private banking market embraced traditional whole-life or universal-life assurance products rejected by their counterparts in, for example, Europe and Australia?
The answer lies in part due to timing
Following several years of market uncertainty, and a general lack of trust of traditional portfolio management services, many HNW investors have turned to capital protected investment products, and absolute return products, measuring performance solely against risk free interest rates. With interest rates languishing at extremely low levels the modest but guaranteed rates offered by the life companies seemed particularly attractive. Enter a small number of opportunist and eager insurance specialists with access to traditional whole-life assurance products; "commoditize" the offering for ease of sale; introduce the concept to private banks, hungry for something new on the shelf; and add the spice of hefty commissions. The rest is history. Single premium "jumbo" whole-life policies, no longer viable in developed HNW markets - where "unbundling" of life insurance into its various components, and transparency in fees and commissions have become the norm - have become the subject of dinner-table discussion throughout Asia. The offering has gained such popularity, and proved so lucrative, that the small number of specialist brokers advising on "jumbo" policies now have serious competition, and a number of private banks have developed fast-track processes to approve interest rate arbitrage loans to finance single premium payments.
Love it or loathe it, and whether or not the phenomenal growth of whole-life assurance will eventually end in tears, as some experts predict, it has created a new awareness of life assurance, and set the scene for a very interesting future. A number of domestic life companies in Hong Kong and Singapore have developed new products to replicate the offshore US-style products that have had such success; possibly too late as the circumstances that spawned the growth no longer hold. But the infant has taken its first steps, and the strides that follow will doubtless track the steps of HNW investors in more developed markets.
Life insurance for the HNW investor
Why does an ultra HNW family need life assurance? It generally doesn't. Wealthy families are effectively self-insured. They have more than sufficient wealth to ensure dependants are financially secure. Special circumstances may arise which lead an adviser to recommend life assurance for a client; other than commission! Substantial liquidity may, for example, be required on death, to pay estate tax for a business or a real estate portfolio which is the major asset. Or to pay a non-tax debt which the client does not wish to impact his estate. A parent that owns a substantial business that one child will inherit may wish to buy whole-life assurance to ensure that assets are available for the other children of equivalent value. In many situations, however, traditional whole-life assurance is likely to be an expensive and possibly unnecessary tool.
What HNW families always need, however, are the substantial tax, asset protection, and succession planning benefits that life assurance can provide. Most governments have granted generous tax benefits to encourage populations to save and invest using life assurance and pensions. The investment growth within a life assurance policy is generally free of all taxation. And most legal systems provide that contracts of life assurance enjoy significant benefits. Unit-linked life assurance has now developed to such an extent that wealthy investors can select from an almost infinite range of investment classes, to shelter investments from taxation, from unwanted claims, and from other eventualities. In the same way that investment products have evolved to meet the needs of sophisticated HNW investors, with institutional pricing, and flexible conditions, so life assurance solutions will increasingly be imported from more developed markets to match the needs of HNW clients in Asia requiring cross-border estate planning, tax planning, and asset protection solutions. The HNW life assurance market in Asia is slowly coming of age.