Bringing Mutual funds to life

Insurance companies are increasingly becoming an important distribution channel of mutual funds in Asia through investment-linked products, which are life insurance policies combining a protection element with an ‘underlying’ investment.

Insurance companies are employing a wider range of mutual funds to meet customers’ demand for choice and fund managers and distributors alike look at this business as a source of steady and sticky inflows.

“The investment-linked business has been a very critical part of fund managers’ games in the past two years, especially in the aftermath of the crisis,” says Ken Yap, head of Asia Pacific research at Cerulli Associates.

“Investors are still very cautious, certainly interest in mutual funds is pulling back, but we are not getting anywhere like back to the level we saw in 2007,” he says.

Most insurance firms tend to work in close partnership with fund managers, appointed after a rigorous selection process. “The insurance business represents a very sticky steady income stream for fund managers, once they get in,” says Mr Yap. “But if they are not there yet, the barrier to entry is quite high.”

An insurance company wanting to add or change managers, not only will have to get approval from regulatory authorities, which generally set tighter standards than for mutual funds, but will also have to get policy holders’ consensus.

While the mature fund markets of Hong Kong and Singapore are expected to show more modest growth rates, markets like Taiwan, Korea and China, have strong potential for growth. “China is a huge market, it is still closed in terms of how they structure their products, but there is a trend for insurance firms to adopt an open architecture approach and the market can still grow a lot,” says Mr Yap.

Insurance companies need to use a wider range of funds in their investment-linked products, if they want break into banking channels, says Brad Harris, chief product officer at Prudential Corporation Asia. “The banking channel is our core focus and growing faster than any distribution channel,” he explains. Having established partnerships with local banks across the region, the UK life insurer extended and expanded its 10 year distribution agreement with Standard Chartered in 2008, to cover eight markets across Asia, while in January it formed a bancassurance alliance with UOB Bank spanning Singapore, Thailand and Indonesia.

“Banks tend also to have quite an influence on the type of funds used in the insurance product. They may ask for a particular fund managed by a specific manager or they may just be interested in certain types of solutions,” he says.

Unlike the US and UK, where the number of underlying funds ranges between 200 and 300, in Asia the range of products is more limited. In some countries, Prudential offers a selection of ten funds, which is seen as competitive in the specific market, while in other countries up to 50 are selected, says Mr Harris.

Higher numbers of funds are not considered appropriate, as not all insurance agents and bank consultants are certified financial advisers or licensed to offer investment advice. There is a risk the average customer cannot understand all the types of funds, says Mr Harris.

To overcome this issue, In Hong Kong and Taiwan the insurance firm offers a service that embeds advice in the investment solution, recommending a specific diversified fund strategy within the investment-linked product depending on the client’s risk profile.

Investors are interested in the Chinese story and developing markets across Asia and the challenge is to generate more diversified portfolios. “The preference is to invest in Asia, and there is a very strong home bias too,” he says. “But customers like to put their money in just one to three core funds. We are not seeing diversification in Asia and we are trying to push for more.”

Prudential’s ILP platform includes investment funds offered by a broad range of fund houses, including BlackRock, Schroders and Fidelity as well as local boutiques, in addition to funds managed by Prudential in Asia. Third-party funds are growing fast. But because they were introduced only recently, they still lag in-house products, says Mr Harris.

Once selected, funds are rarely removed. “We try not to remove funds unless we really feel it is necessary. It is easy on a single premium, but it is more complicated on a regular premium, when someone has allocated their money into certain funds and you would need to contact them ahead of time, and get the agreements.”

Both fund houses and banks love insurance money because it is sticky, he says. Moreover, persistency measurements or persistency bonuses build into the policies encourage investors to keep the policy enforced.

Ben Ng, Cardif

This is why it takes two to three months to do the due diligence analysis on a new fund, states Mr Harris. The due diligence and regional negotiations with partners are carried out by Prudential Asset Management (Pam) in Singapore. Pam also delegates management of some of its assets to third-party managers, in a white-labelling fashion, although banks like to be able to say they offer products from different fund houses, he explains.

Working in collaboration with third-party fund providers is an established trend in Asia. In Singapore, Manulife insurance offers 24 underlying funds for its unit-linked products. The funds are mainly managed in-house but include feeder funds too, sourced from six third-party managers, Aberdeen, DBS Asset Management, Deutsche AM, Legg Mason, Schroders and UOB Asset Management.

“In Asia the investment appetite is for Asian domiciled funds, less for US or European funds,” confirms Nick Czolak, chief marketing officer at Manulife Singapore. Of the S$2.5bn ($1.9bn) the firm manages in investment-linked products, around 20 per cent are accounted for by Singaporean funds, while just under 10 per cent is invested in China. Indian funds are also popular, as Singapore has a large Indian community.

“Our agents are more comfortable talking about local stories and our customers are more sensitive to hearing about local stories and other popular strategies,” he says.

Fund managers selected have a long history of working with Manulife globally and are not changed often, although the company is constantly reviewing underlying performance. Changing feeder funds can be challenging, as it means finding a fund using a similar strategy to the fund being removed. Segregated mandates, used by Manulife’s Hong Kong operation for example, offer more flexibility to tailor the product and it is easier to change the fund manager if not performing, says Mr Czolak .

“The maturity of the business in Hong Kong is significantly greater, the size of the funds is much bigger and the operation is much more able to cope with managing more complex relationships,” he says.

In Singapore, investment-linked insurance products are sold largely through agents, as the bank channel has not been successful. “The banks are already selling mutual funds, so they look to insurance companies to provide traditional insurance saving vehicles,” says Mr Czolak.

However, major banks in Asia consider insurance products a core part of their product offering and recent regulation, requiring banks to do more need-based selling, should have a positive impact on the business.

“Investment-linked products have always been a core part of our insurance offering, which covers three major needs of the customers: family protection, wealth accumulation and retirement planning,” says Bruno Lee, regional head of wealth management, Personal Financial Services Asia Pacific at HSBC. “And investment-linked products fit very nicely in wealth accumulation.”

The main challenge of distributing these products is related to the fact they are long-term plans, so the customers have to realise they have a gap in their wealth plan, discuss how much they can afford to put aside and it is generally a relatively long selling time, involving planning, product selection and so forth, says Mr Lee.

In the past couple of years, the HSBC Group has been developing its in-house capabilities in the insurance sector across the region. HSBC bank works predominantly with HSBC Life, which provides the wrapper in the investment-linked products. The personal financial services division within the bank selects the underlying funds. “In the markets where we have our in-house insurance manufacturing capability, we will use our own,” says Mr Lee.

In some markets, external insurance providers are used to fill gaps – such as Ping An and Allianz in China – or to comply with different countries’ regulations.

“Working with an internal partner provides us with more control. There is no point in offering multiple investment-linked insurance wrappers, as we want to simplify the process for customers. The most important thing is the design of the investment- linked insurance in a way that is competitive and beneficiary to the customers and to select the appropriate underlyings.”

Within investment-linked products, HSBC offers 30 to 50 funds, sourced from less than 10 providers, depending on country regulation. “The reason we offer a carefully selected range of funds is because we feel investment-linked products are much more appropriate for longer term planning; it will be inappropriate to keep on choosing and switching within the investment-linked plan,” says Mr Lee.

DBS adopts a different business model. In 2009, the bank changed in advance its Singapore-only 10 year deal of exclusivity with Aviva, entered into in 2001, to a regional ‘preferred provider’ partnership. The new contract, extended to 2015, gives both companies more flexibility to better meet the needs of their shareholders, explains Rick Vargo, head of bancassurance at DBS.

Indeed, it gives the bank an opportunity to provide products that best meet the needs of customers, where Aviva might not have expertise or desire to build the infrastructure, and occasionally it may help the bank to get a better margin product than the preferred partner could offer, states Mr Vargo.

Aviva is the bank’s preferred partner in the region, but the bank works with other insurance companies such as Manulife in Indonesia and Hong Kong, Allianz and Fubon in Taiwan and Aia in Indonesia and China. “I think more so going forward you will see less exclusives and more preferred providers or open platform, it will be one of these two models as opposed to exclusive,” says Mr Vargo.

Although some banks try to influence insurance companies on choice of underlying investments they should use, this is not the approach employed at DBS. “We try not to influence at all what those underlying funds might be,” he says. “I am a big believer in keeping things straightforward and let the insurance company and the asset manager do what they do best. We make sure we do a good job of aligning and matching an appropriate product solution to customers’ needs, based on their risk profile, needs and time horizons.”

Cardif finding shelter under an insurance umbrella

In Taiwan, bancassurance has grown rapidly since Lehman Brothers’ collapse, states Ben Ng, country manager, Taiwan at Cardif, the insurance subsidiary of BNP Paribas Group.

When the tied agency force was greatly impacted by the market crash and severely shrunk, the bank channel took over. Unit-linked products used to employ mainly structured notes as underlying investments, until the Lehman Brothers bankruptcy. Companies like Cardif, which focus exclusively on bancassurance, had to find ways to grow their business. “We went into mutual funds, using insurance as an umbrella,” says Mr Ng.

Although Cardif did not have Lehman exposure, thanks to more stringent requirements for insurance products, its $800m of annual premiums from structured notes fell to zero after the Lehman crisis. “We moved to bond funds, mainly, and the dividend paying funds were very well received by our customers,” he says.

Cardif manages $2.7bn in unit-linked assets, equally split between mutual funds and structured notes, mainly principal protected, belonging to policies sold in the past. “Within a year, we have accumulated about $1bn in AUM in mutual funds, which shows insurance is an effective way to grow the assets under management,” adds Mr Ng.

Banks can pick their favourite products amongst more than 500 funds and ETFs that Cardif offers as underlying investments in its unit linked policies. Many are offshore funds managed by houses such as Fidelity, JP Morgan, UBS, BNP Paribas Investment Partners plus some local fund houses.

“BNP Paribas is only one of our main partners and they do not represent the majority of assets,” says Mr Ng. “We are in a b2b sector, some of our partners may have their preferred fund houses and we try to customise our service to our partners and meet their demand.”