Demand Surges For Insurance-Linked Investments
Friday, October 22, 2010
Demand for offshore insurance-linked investments in emerging markets is both
large and underserved, and wealth managers may need to adapt to cater for this
new business, according to a new report.
Current estimates are that less than 5% of all wealth management portfolios
in emerging markets include an insurance component but demand is rising among
individual investors, finds research by Scorpio Partnership, which indicates
that life policy-linked instruments within investment portfolios are expected
to increase to 15% within five years.
This would suggest a high-net-worth market of assets that could incorporate
insurance-wrapped cover of almost USD1.2 trillion, the report suggests.
“This is an untapped frontier of wealth management, said Sebastian Dovey,
Managing Partner. "To date, in the offshore emerging market context most
private banks have scratched the surface of demand for insurance solutions.
The attitude appears to be that insurance is too complex to sell and so focus
is shifted elsewhere on the product palette. It is our view that in the search
for new and sustainable revenue streams the more forward thinking banks will
now adjust course to incorporate these solutions as there is demand and the
complexity is surmountable."
Based on these demand projections, Scorpio Partnership’s view is that
there is a strategic opportunity for private banks to pro-actively broaden product
capability in this area targeting emerging markets (and as part of a broader
global strategy) and develop a structured approach to the distribution of these
financial solutions to wealthy clients.
Typically, international wealth managers have focused their insurance sales
in emerging markets upon the ultra high-net-worth market, according to Scorpio.
However, the research indicated the real demand (and stronger fee potential)
rests with the USD1m-10m investable asset base.
“Private banks’ still consider insurance a retail issue and ignore
it, often in spite of the relevance for their client base,” stated Dovey.
Scorpio suggests that the interest about insurance-linked investments is the
"stickiness" of the relationship. 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.
“Life policy investments present the banks with a longer and more durable
earning cycle which in current market conditions must be thought of as more
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,” said Dovey adding the main delay in this growth
has been the lack of push from the distribution channels of wealth managers.
Nonetheless, Scorpio said that "the opportunities to drive significant
revenue through insurance in the wealth market are clear" and suggested
that 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, it observed, noting that several banks and life carriers
appear to be starting the process of addressing this.