Event held: Zurich
Sponsor: Swiss Life
Photographer: Andaleeb Lilley
The life insurance industry has gone through unprecedented upheaval in recent years as financial regulators demanded greater compliance and transparency in the wake of the global financial crisis. The impact of this increase in regulation on the industry was at the heart of a discussion by a panel of experts at a recent STEP Journal roundtable hosted by Swiss Life. Below is a snapshot of some of the issues discussed.
An introduction to life insurance
By Marnin Michaels TEP and Anne Gibson, Baker & McKenzie, Zurich
Life insurance is now a prevalent and important wealth-management strategy, especially in Europe. This panel discussion provides an insider’s view of important aspects of the insurance industry and how insurance products can help clients to achieve their wealth- planning goals. To fully understand the possibilities, one needs an understanding of the basics of life insurance planning.
Benefits of life insurance
Life insurance provides an important wealth-planning option largely due to the tax and other legal benefits it can offer. While the specific tax laws of each country may differ in their treatment of life insurance, some generalisations can be made.
Many countries offer tax advantages to holding wealth in the form of life insurance. In particular, many offer income-tax-free growth for investments in the policy. Depending on the particular circumstances, it may also be possible for individuals to take loans against the policy value, thereby gaining access to these tax-favoured funds. Additionally, some countries allow income tax deductions for the payment of life insurance premiums. In countries that have some sort of death tax, such as an inheritance tax or estate tax, the possibility of tax-free distributions from the policy to the beneficiaries can be a significant benefit.
Outside of the tax context, because the assets held in the policy are owned by the issuer, a life insurance policy can essentially offer asset and creditor protection to the policy owner and beneficiaries. Finally, because a life insurance policy creates a contractual right in the beneficiaries to the eventual payout from the policy, it can be a way to avoid local probate laws, including forced heirship laws, if any.
Common products
There are many different types of life insurance products and it is not possible to cover them all in detail. However, some basic types are discussed below.
Term insurance: this provides coverage against death for a specified period of time. Generally, it contains only mortality coverage and does not have an investment component.
Whole life: this policy will insure an individual for their lifetime. Unlike the term policy, the premiums for a whole-life policy will generally be more level, such that the premiums paid in the earlier years will contribute to the build-up of equity in the policy. This build-up of ‘cash value’ is available to the policy owner in the case of surrender of the policy and possibly in the form of a loan backed by the policy.
Universal life: universal life policies are a type of whole-life policy, but offer more flexibility in terms of premium payments and death benefit options than traditional whole-life policies.
Variable life: these policies offer further flexibility beyond universal life policies. Typically, different investment options are offered and in some cases the policy owner can select an outside investment manager. This can put the investment risk on the policy owner, rather than the issuer, but can also lead to better investment returns.
Private placement insurance: these products are generally custom-crafted for individual wealthy investors. They typically have a single large premium, which may be paid in kind, and the custodian of the assets and the investment manager can generally be chosen by the policy owner.
Life insurance and trusts or foundations
Life insurance is sometimes seen as an alternative to trusts or foundations. Life insurance policies offer many of the benefits of trust structures, such as creditor and asset protection, avoidance of probate, and tax-advantaged investing compared to investing directly as an individual. Life insurance might be preferable for someone who lives in a jurisdiction that does not have trusts or foundations and who is therefore not as familiar with them. Purchasing a commercial policy might also be seen as more cost- and time-effective and less cumbersome than creating a trust.
However, life insurance does not have to be just an alternative to a trust or foundation. Trust structures in which underlying entities hold insurance policies can be very effective and can increase some of the benefits inherent in insurance as an investment and asset-protection strategy.
A changing market
Panellists agreed that the new regulatory environment had heralded positive changes to the industry, closing the door on the old days of ‘banking secrecy’. However, the increase in regulation had a detrimental effect on smaller insurance firms, which were priced out the marketplace, as they were unable to afford the additional cost of ensuring compliant operations.
Dr Peter Hsu thought that sustainable life insurance firms and products must adapt to this new regulatory environment: ‘The times of simple discount-priced insurance wrappers are over. The business has become more complex and more costly as products are tailored to the needs and requirements of clients, and adjusted to the jurisdiction in which the product is sold or where the policy holder or insured is domiciled,’ explained Peter.
Marnin Michaels highlighted the tension between the growth potential of high-end products – life insurance policies with associated tax benefits that, for example, help manage forced heirship provisions – and the fear of mainstreaming life insurance products. ‘The industry should look to sell less product with a higher margin rather than more product with a lower margin,’ said Marnin. He was concerned that a trend of ‘dummying down’ products had emerged, whereas the opposite was required – products should be made to have more value. ‘As an industry, we’re only as good as our weakest component, which is the weakest product issued by the best carrier, or, even worse, the weakest product issued by the worst carrier with the worst asset management underneath,’ he explained.
If we want to get back to a more rational environment, we have to, as an industry, stop the irresponsible behaviour. Even if 99 per cent of the industry is compliant, regulators will focus on the 1 per cent of the industry that is not
An external view of the Swiss market
Olivier Kramer, who works in Swiss Life’s international division, and who chaired the panel, asked Emidio Cacciapuoti, who is based in Italy, and Thierry Flamand, who is based in Luxembourg, what their perception was of the Swiss marketplace. ‘Is Switzerland still perceived as a struggling offshore market, or do you feel that the country is coming to terms with the new regulatory environment?’ asked Olivier.
Emidio felt a definitive answer could not yet be given: ‘There is no doubt that the future is compliance and transparency. But how this is achieved, and whether the process of getting there is going to be fast or long and painful, is yet to be seen. I would prefer the first option of course.’
Thierry’s view was that life insurance is more popular than ever: ‘We see more and more assets coming into the life insurance contract in Luxembourg. Life insurance can really add value when you take into account the tax advantages and asset protection offered by the product.’
An era of ‘über-compliance’
The Swiss Financial Market Supervisory Authority (FINMA) implemented a set of rules in April 2010 under which a custodian bank has to clearly document the identity of the policy holder. However, in Luxembourg, confidentiality requirements provide that a life insurance undertaking is not authorised to disclose the identity of its policy holders to its custodian bank. In terms of custody, the bank’s client is the life insurance undertaking, not the policy holder, as the insurer is the legal owner of the underlying assets of the insurance contract. Marnin predicted this policy will have major repercussions in Luxembourg in the next five years, while Thierry maintained that the automatic exchange of information would ensure transparency, at least for EU residents.
This issue triggered a heated debate among the panellists on what Olivier coined the current era of ‘über-compliance’. ‘Is this era of über-compliance a temporary trend and we will come back to a more balanced situation, or do we expect the increased regulatory pressure, compliance needs, and administrative burden on all players in the financial industry to continue?’ Olivier asked the panel.
The panellists felt that the current regulatory environment was brought about by the previously irresponsible behaviour of members of the insurance industry. Regulators responded to this bad behaviour with a raft of compliance and transparency regulations. The panellists agreed that insurance companies have to assume more responsibility and take the leadership to ensure that past mistakes are not repeated. ‘If we want to get back to a more rational environment, we have to, as an industry, stop the irresponsible behaviour. Even if 99 per cent of the industry is compliant, regulators will focus on the 1 per cent of the industry that is not. It really harms the entire industry,’ said Marnin. Peter then underlined the importance of compliance: ‘It’s in the interest of all of us that are seriously doing business and doing sustainable business.’
It was also felt that cooperation at all levels in the industry is paramount. The industry and regulators should share information in order to make the system work from both sides. Only then will the client be protected.
Opportunities
The challenges faced by the insurance industry are abundant, but so are the opportunities. Dr Josef Haid explained that new markets are opening up, since compliant products are needed by clients and their banks, with prospects in Russia, Eastern Europe, Latin America and certain African countries. He also felt there was more interest from trusts on the company side, as trustees now realise life insurance can often complement the trust structure – for example, allowing for a tax-compliant set-up.
Olivier asked whether panellists’ clients used non-Swiss-issued life insurance policies that were administered by Swiss operators: ‘Is insurance used as a bridge to access non-Swiss-based clientele via the insurance company?’
Leonhard Toenz felt that clients outside the US, Canada and Europe were unfamiliar with life insurance as a tool to structure and safeguard monies, and, although he felt there was the potential to attract new clients, the complexity of the situation was not to be underestimated. ‘There is hesitation on the part of regulators to allow their life insurance companies to take foreign risks,’ Leonhard explained.
It was also felt that government policy, which seeks to incentivise saving, worked in the insurance industry’s favour.
The Swiss finish
The panellists agreed that the quality of professionals, service and understanding of the global marketplace in Switzerland is undisputed, but that the wealth-management sector had failed to articulate its value proposition. ‘Switzerland struggles to communicate its know-how. I would say the “Swiss Finish” doesn’t seem to be very visible outside Switzerland,’ noted Olivier.
‘Switzerland is known for selling exceptional quality, from Swiss watches to Swiss chocolate. The one area where we have not sold quality is the wealth-management sector. Instead, we sold “secrecy”, and it’s so silly because we have the quality. We’re better at wealth management than we are at watches and chocolate, so let’s show everyone we are better,’ rallied Marnin.
Meet the panel
Emidio Cacciapuoti
Partner at King & Wood Mallesons/SJ Berwin in Milan, specialising in the tax aspects of corporate tax, including private equity fund structures, carried-interest schemes and corporate reorganisations. He also deals with tax issues related to financing and securitisation transactions.
Thierry Flamand
Partner in the advisory and consulting department of Deloitte Luxembourg. Thierry is the insurance industry leader for Deloitte Luxembourg and has over 18 years of professional experience in the insurance industry.
Dr Josef Haid
Managing Partner of NMG International Financial Services Ltd, a leading life insurance broker in Zurich. He has over 15 years of consulting and management experience in advising business owners and senior executives of large corporations on management and investment decisions, and is a frequent speaker at international wealth-planning conferences.
Dr Peter Hsu
Partner and key contact for the banking and insurance practice at Bär & Karrer. His practice concentrates on banking, insurance and financing. He advises clients on regulatory and contract law matters, as well as on M&A transactions. He has published books and articles on banking and insurance and is Co-editor of the Basler Kommentar zum Versicherungsaufsichtsgesetz.
Marnin Michaels TEP
Partner at Baker & McKenzie in Zurich. Marnin has been practising for more than 15 years in the areas of tax and international private banking. He handles insurance matters, particularly as they relate to tax investigations and wealth management.
Leonhard Toenz
Partner at Altenburger, Zurich. Leonhard is Head of the Insurance and Tax Teams. He has long-standing and extensive experience in all legal, as well as regulatory, aspects of the insurance industry, primarily advising insurance companies selling out of Switzerland and Liechtenstein to Swiss and foreign clients. He also advises companies and private clients on tax matters.
Swiss Life Group is one of Europe’s leading comprehensive life and pensions and financial solutions providers. Its solutions for global high-net-worth clients combine an investment portfolio with high-end life insurance, and are distributed in cooperation with private banks, family offices, law firms, asset managers and brokers. An international network with a presence in major financial cities allows Swiss Life to deliver local knowledge with global expertise.