By Regis Nyamakanga
UNIT trusts have wrest ed a large share of premium income away from life companies in recent years, but disinvestments and surrenders are expected to balloon as the credit squeeze starts to bite, an insurance expert at Ernst & Young said yesterday.
Tim Rutherford, lead director for insurance at Ernst & Young said insurers had started offering flexible investment and risk products similar to those proffered by unit trusts in order to recoup its waning share of investment premiums.
“Insurance companies have had to look hard at their product offering in the past three years, as they have had to deal with the negative effect of various pension fund adjudicator decisions on their traditional products.
“The flexibility offered by unit trusts to investors and the wide range of offerings have appealed to the younger markets, that often perceive insurers as old-fashioned,” Rutherford said.
“To vie for a market share of the investment premium, insurers have begun to offer more flexible investment and risk products simpler to understand, with a transparent fee structure similar to those of unit trusts,” he said.
As higher interest rates and a slowing economy started to eat away at household income, Rutherford said unit trusts were expected to start experiencing larger-scale outflows than insurers, bringing an end to the boom.
“We can certainly expect to see a large number of disinvestments and surrenders as investors feel the credit squeeze and stop saving as they need the income to pay household expenses or surrender the policy or unit trust to pay off costly debt. This is when the more flexible unit trust products could potentially feel the reduced premiums and outflows harder than their insurance counter parts,” he said.
Rutherford’s comments came after Ernst & Young yesterday released a report showing the insurance industry had given the International Accounting Standards Board (IASB) strong support for the development of a high-quality global insurance standard.
The report, prepared for the world’s most influential insurance trade bodies, shows some divergence of opinion on how the standard should be “drafted and implemented, often depending on geography, regulatory environment or industry sector”.
The industry was, though, in agreement accounting for insurance should reflect economics of the business. There was little support for present exit values, the report said.
“Many respondents do not agree the transfer concept is appropriate for valuing insurance liabilities. The ‘value in settlement’ measurement supported by many emphasises ultimate settlement, as contracts are not likely to be transferred, but paid or settled by the company in the future,” the report said.
James Dean, practice leader for Ernst & Young’s Global Insurance Centre said: “Whatever final insurance standard the IASB develops will result in a fundamental change in the finance and actuarial functions of many insurance companies. Understanding the effects on systems, data, pricing and capital management will be a major challenge. Insurers should start now to examine how this will affect their financial systems and statements.”