Insurance companies are increasingly becoming an important distribution channel of mutual funds in Asia through investment-linked products, which are life insurance policies combining a protection element with an ‘underlying’ investment.
Insurance companies are employing a wider range of mutual funds to meet customers’ demand for choice and fund managers and distributors alike look at this business as a source of steady and sticky inflows.
“The investment-linked business has been a very critical part of fund managers’ games in the past two years, especially in the aftermath of the crisis,” says Ken Yap, head of Asia Pacific research at Cerulli Associates.
“Investors are still very cautious, certainly interest in mutual funds is pulling back, but we are not getting anywhere like back to the level we saw in 2007,” he says.
Most insurance firms tend to work in close partnership with fund managers, appointed after a rigorous selection process. “The insurance business represents a very sticky steady income stream for fund managers, once they get in,” says Mr Yap. “But if they are not there yet, the barrier to entry is quite high.”
An insurance company wanting to add or change managers, not only will have to get approval from regulatory authorities, which generally set tighter standards than for mutual funds, but will also have to get policy holders’ consensus.
While the mature fund markets of Hong Kong and Singapore are expected to show more modest growth rates, markets like Taiwan, Korea and China, have strong potential for growth. “China is a huge market, it is still closed in terms of how they structure their products, but there is a trend for insurance firms to adopt an open architecture approach and the market can still grow a lot,” says Mr Yap.
Insurance companies need to use a wider range of funds in their investment-linked products, if they want break into banking channels, says Brad Harris, chief product officer at Prudential Corporation Asia. “The banking channel is our core focus and growing faster than any distribution channel,” he explains. Having established partnerships with local banks across the region, the UK life insurer extended and expanded its 10 year distribution agreement with Standard Chartered in 2008, to cover eight markets across Asia, while in January it formed a bancassurance alliance with UOB Bank spanning Singapore, Thailand and Indonesia.
“Banks tend also to have quite an influence on the type of funds used in the insurance product. They may ask for a particular fund managed by a specific manager or they may just be interested in certain types of solutions,” he says.
Unlike the US and UK, where the number of underlying funds ranges between 200 and 300, in Asia the range of products is more limited. In some countries, Prudential offers a selection of ten funds, which is seen as competitive in the specific market, while in other countries up to 50 are selected, says Mr Harris.
Higher numbers of funds are not considered appropriate, as not all insurance agents and bank consultants are certified financial advisers or licensed to offer investment advice. There is a risk the average customer cannot understand all the types of funds, says Mr Harris.
To overcome this issue, In Hong Kong and Taiwan the insurance firm offers a service that embeds advice in the investment solution, recommending a specific diversified fund strategy within the investment-linked product depending on the client’s risk profile.
Investors are interested in the Chinese story and developing markets across Asia and the challenge is to generate more diversified portfolios. “The preference is to invest in Asia, and there is a very strong home bias too,” he says. “But customers like to put their money in just one to three core funds. We are not seeing diversification in Asia and we are trying to push for more.”
Prudential’s ILP platform includes investment funds offered by a broad range of fund houses, including BlackRock, Schroders and Fidelity as well as local boutiques, in addition to funds managed by Prudential in Asia. Third-party funds are growing fast. But because they were introduced only recently, they still lag in-house products, says Mr Harris.
Once selected, funds are rarely removed. “We try not to remove funds unless we really feel it is necessary. It is easy on a single premium, but it is more complicated on a regular premium, when someone has allocated their money into certain funds and you would need to contact them ahead of time, and get the agreements.”
Both fund houses and banks love insurance money because it is sticky, he says. Moreover, persistency measurements or persistency bonuses build into the policies encourage investors to keep the policy enforced.
