Tapping the potential of life insurance investments

Demand for high net worth (HNW) offshore insurance-linked investment – universal life, variable life and Private Placement Life Insurance – structures in the emerging markets is both large and underserved by private banking businesses.

Scorpio Partnership estimates that less than 5 per cent of all wealth management portfolios in emerging markets include an insurance component. However, demand is rising among individual investors and we project life policy-linked instruments within portfolio solutions are expected to increase to 15 per cent within five years. This would suggest an HNW/UHNW market of assets that could incorporate insurance-wrapped cover of almost $1,200bn (€857bn).

Surprisingly, given the growing interest to tap this market by life companies and rising demand from end investors, developing an insurance solutions strategy at most private banks is still considered to be “tomorrow’s problem”. However, demand and opportunity suggest that it is “today’s need”. Indeed, this is an untapped frontier of the wealth space, although some insurers are pushing ahead of the traditional private banking distribution channels.

Our view is that there is a strategic opportunity for private banks to pro-actively broaden product capability and target emerging markets and develop a structured approach to the distribution of these financial solutions to HNW and UHNW clients.

Notably, it is judged that the crucial market is the HNW community which encompasses $7,800bn in assets. International wealth managers have so far focused their insurance sales in emerging markets upon the UHNW market space. However, the insight indicated the real demand (and stronger fee potential) rests with the $1m-10m investable asset base.

Specifically, of the 14 markets, those in the Asia Pacific region appear to show the strongest characteristics for substantive growth in consumption of insurance instruments. This view is based on a number of factors such as:

• Presence of relatively benign regulatory conditions for the sale of insurance products in many target emerging markets
• Positive demographic conditions in most relevant emerging markets in relation to the appeal of life-linked investments
• Introduction of a strong growing customer preference for dynamic wealth planning solutions as generation transfer rises up the priorities
• Presence of a strong carrier landscape with fast growing uptake in the general insurance fields and the potential of a strong distribution channel through the private banking sector.

The caveat in this landscape currently is that the private banks have appeared to be relatively slow on the uptake of this potential distribution opportunity. Indeed, many still consider insurance a retail issue and ignore it, often in spite of the relevance for their client base.

Beyond the headline revenue potential the stickiness of the relationship between client and institution is also highly relevant. Both private banks and carriers acknowledge that life-linked solutions have an average relationship cycle of 10 years. Most bankers noted that this was as much as three times as long as the typical length of a portfolio relationship with a bank.

In this context, life policy investments present the banks with a longer and more durable earning cycle. In current market conditions must be thought of as attractive. Indeed, for the right circumstances, the insight strongly suggests that insurance-linked solutions will become a mainstream product within a decade in the emerging markets.

The opportunities to drive significant revenue through insurance in the wealth market are clear. To achieve these, private banks should consider the development of a strong internal insurance advisor capability. Broader education of the banking staff could also increase awareness and sales, as could re-orientation of teams and augmentation of the front-line with specialists. However, only a handful of institutions appear to be tackling these issues so far giving them a strong potential first-mover advantage.

Sebastian Dovey is a managing partner at wealth management strategy think-tank Scorpio Partnership.