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.