Life insurance of the future

In the media, one repeatedly encounters the opinion that the end of traditional life insurance is near and that this type of future provision is no longer needed due to decreasing yields and reductions in the guaranteed minimum interest rate.

The numbers, however, show quite a different picture. Pensions and life insurance are increasingly being seen as attractive products. A survey performed in the year 2016 across Austria by the market research institute Integral showed that pensions recorded a stark increase in popularity among different forms of saving and investment. It was chosen by 35% of the respondents, while only 28% made this choice in the previous year. Life insurance took third place on the popularity scale with a score of 40% (35% in the previous year), behind savings accounts and building society savings.

The criticism of life insurance is based on the current low interest rate environment. Vienna Insurance Group’s Austrian life insurance business is also highly challenging due to the large portfolio that has developed over the years and the low level of interest rates. The decrease in the financial result reduces profits in such an environment. The average yield on investments of around 3% nevertheless fully covers the average minimum rate of 2.3% guaranteed for life insurance – over the medium term.

Even Vienna Insurance Group’s yield on new investments of slightly less than 2% is clearly above the guaranteed minimum interest rate of 0.5% that has applied since the beginning of the year. That means this segment can still earn the guaranteed minimum yield even in difficult times. This is important for customers and shareholders to know, but is not the main reason that life insurance is so important. Traditional life insurance is, after all, one of the few products that can guarantee customers a life-long annuity and therefore plays a particularly important role in old age provision.

Unit-linked and index-linked life insurance, which requires considerably less equity-backing from insurance companies and offers higher expected returns for customers, is becoming more popular in the current low interest rate environment. This is a trend we are monitoring in the Austrian Group companies, and also increasingly promoting, given the costs of life insurance guarantees.

One has to consider that, as an insurance company, Vienna Insurance Group first and foremost offers protection against risk. This has not always been given the importance it deserves in the past. However, protection against risks is the key characteristic that distinguishes insurance from pure investment products. Increased attention to coverage of biometric risks when designing products is therefore a key factor in the attractiveness of life insurance products in the future.

This is the area that Vienna Insurance Group is examining when considering “life insurance of the future”. The focus is on whether product should also include property benefits in the future, in addition to the usual features. These could, for example, be benefits related to “ambient assisted living”: that is, the use of digitisation in households of the elderly, nursing care benefits required by the elderly or programs for maintaining health.

The relationship between the associated costs and the added value for customers must be evaluated and fairly priced. There is no question, however, that the demand for life insurance and future provision products exists. It will be up to the insurance companies to use their creativity and motivation to provide appropriate solutions that satisfy customer expectations. Through the strong local ties of Vienna Insurance Group companies they are ideally suited for this task.