INTERNATIONAL EXPERIENCE OF LONG TERM LIFE INSURANCE: A MODEL PROPOSAL FOR EMERGING MARKETS

1. INTERNATIONAL EXPERIENCE OF LONG TERM LIFE INSURANCE: A MODEL PROPOSAL FOR EMERGING MARKETS Dr. Ahmet Naim OKTAY Yeditepe University

2. INTRODUCTION

3. Introduction • The Caucasia is a geopolitical region at the border of Europe and Asia and situated between the Black and Caspian Sea. Politically, the Caucasus region is separated between northern and southern parts.

4. Introduction

5. Introduction North Caucasia comprises of the following states: • Russian Federation (partially) → nominal GDP/Capita $12.993 • Chechnya Pop: 1.268.989 • Dagestan Pop: 2.910.249 • Ingushetia Pop: 412.529 • Adyghe Pop: 439.996 • Kabardino-Balkaria Pop: 859.939 • Karachay-Cherkessia Pop: 477.899 • North Ossetia Pop: 712.980 • KrasnadorKraiPop: 5.226.647 • Stavropol Krai Pop: 2.786.281 • Total Population15.095.469

6. Introduction South Caucasia consists of the countries below: • Azerbaijan (Pop: 9.165.000, nominal GDP/capita: $6.872 • Georgia (Pop:4.469.000, nominal GDP/capita: $3.210 • Armenia (Pop:3.262.200, nominal GDP capita : $3.032 Total Population : 16.896.200 As a result when we talk about Caucasia Region we talk about a population of 32.000.000. Of course this 32.000.000 belongs to different cultures and has different languages. But life insurance has a universal language which we will have a look in this study.

7. Introduction The World Bank classifies countries according to their GDP per capita. TABLE I: Classifications of World countries according to GDP/Capita Source: HalilSeyidoğlu, International Economics p.12 & World Bank Report, p.75

8. Introduction TABLE II: Development in GDP/Capita and Life Insurance *2005 and 2010 includes individual pension funds and their participant. Source: Ahmet NaimOktay, Principale of Investment in Life Insurance, p.2-3, Pension Monitoring CentersStatictics ad Insurance Supervisory Board Reports. www.tuik.gov.tr

9. HISTORICAL DEVELOPMENT OF LIFE INSURANCE

10. Historical Development Of Life Insurance The main motivation for life insurance is to provide financial assistance for people after the decease of the family’s breadwinner. • In ancient Greek • Rome • Arider to marine insurance policies

11. Historical Development Of Life Insurance The first example of a life policy was issued in Great Britain in 1583. • “Amicable Society for a Perpetual Assurance Office” 1757. • Somemathematicians were working on mortality tables. • Edmund Halley • James Dudson(1755). • Equitable Life Society established in 1762 • Richard Dune and William Morgan to invent “whole life” policies. • “insurable interest” in life contracts in 1774. • Firstproducts with profit sharing launched by Westminster Society (1792) and Pelican Life Office (1797).

12. Historical Development Of Life Insurance • After the industrial revolution, for both death and retirement benefit became a new trend. • In parallel with increasing inflation and volatilities in 1970’s, Universal Life policies • Severallife insurance companies had to be liquidated • BalwinUnited (1983). Executive Life (1991), First Capital Life (1991), Fidelity Bankers Life, Monarch Capital Corporation, Mutuel Benefit (1991).

13. Historical Development Of Life Insurance • In order to protect insured’s from this kind of financial disasters, states brought new regulations • The solvability • The transparency • The audit and rating.

14. THE IMPORTANCE OF LIFE INSURANCE IN TERMS OF ECONOMICS

15. Impact of Life Insurance on Macro-Economics Someresearches showing that insurance market has significant roles in promoting economic growth. The process of economic growth requires investment and increases in real savings.

16. Impact of Life Insurance on Macro-Economics • There are a lot of instruments of which people can save • accounts in the banks, securities, bonds, etc. • But life assurance provides protection from economic loss of an unexpected death, people can also save through their life • We can say that, premium payment may be considered as a semi-compulsory saving.

17. Death risk (0,00) Risk 11 10 9 8 Premium 7 6 5 4 Impact of Life Insurance on Macro-Economics 3 2 1 T=time 10 20 30 40 50 0 60 70 • The logic of those premium reserves • early premium payments result in overpayments in the early policy Source: Ahmet NaimOktay, Pension Funds and their taxation, p.99 • In this way, life insurance has indirectly increased savings of the economy.

18. Impact of Life Insurance on Macro-Economics • TABLE III: Life premium volume in USD in 2010 • Source: Sigma, World Insurance in 2010, Statistical Appendix, p.10 • The life insurance premium composes 57,9% of the total premium volume which is USD 4.324.239 million.

19. Impact of Life Insurance on Macro-Economics An empirical and theoretical study done in Nebraska shows us • that one percentage point increase in the growth of life insurance industry is associated with a 0,25 per cent increase in the growth rate • the life insurance growth explains approximately 14% of the variance of economic growth

20. Impact of Life Insurance on Macro-Economics • Insurance and pension sector normally induces a superior GDP growth then other sectors. • Source: TSSRB, Shaping our future: 2023 vision for Turkish Insurance Sector, 2012, p.6

21. Impact of Life Insurance on Macro-Economics Europe • produces 38% of life premiums, in theworld • life insurance reserves and in pension funds reserves was 1.442.643 million of euro in 2011

22. Impact of Life Insurance on Household’sEconomics • Thefamily as a smallestunit of thesocietyandeconomy

23. Impact of Life Insurance on Household’sEconomics Keepin mind some differences from general insurance: • risk namely “death” is certain. • life insurance is a long-term contract • It is difficult to determine the economic or the financial value of life. • lifeinsurance contract is not a contract of indemnity. • the premium is calculated according to mortality table.

24. Impact of Life Insurance on Household’sEconomics • Differenteconomic uses life insurance offers: • Life insurance makes the family financially secure. • Life insurance is also a saving instrument. • Helpsin meeting responsibilities of even after death like higher education of children, • Helps in repaying the mortgage loans • Life insurance also provides old age benefits, • Creditors can also use it in case of non-repayment

25. Impact of Life Insurance on Household’sEconomics People are likely to change their saving behaviour if they have life insurance • they feel less necessary to accumulate funds • policy loans are utilized as an emergency fund • insurance helps reducing worry and fear • peaceof mind, • increases the happiness of individuals.

26. Impact of Life Insurance on the Micro-Economics • Partners of firm can get the lives of the partners insured • A firm can get the life of its key man insured • Group insurance policies can improved productivity. • Industryoffers regular full time employment to a large number of people

27. TYPES OF LONG TERM LIFE INSURANCE

28. Types of LongTerm Life Insurance • Term life insurance • Whole life insurance • Endowment insurance • Pensions

29. TermAssurancePlans • protection for a limited number of years. • no maturity value. • The face amount of the policy is payable only if the insured’s death occurs. • Nothing paid in case of survival • Can be issued for a short period but customarily provides protection for at least a set number of years, • Since price of terms products of different companies can be easily comparable, a wide variety product diversification was made

30. TermAssurancePlans • Level term assurance: The amount insured is at a fix level within the term of the policy. • Renewable Term Assurance: The insured can renew his policy at maturity date without any medical examination. • Convertible Term Assurance: The insured can convert his policy into a whole life or endowment policy at any time he wants. • Decreasing Term Assurance: These policies are commonly used to pay off a loan balance on the death of the debtor, insured e.g. mortgage protection plan.

31. TermAssurancePlans • Expanding Term Assurance: Fixed Death Benefit may cause a decrease in real terms during the period of the policy. This policy gives the opportunity to increase death benefit at a fixed rate each year. • Index-linked Term Assurance: This type of policies gives a rise to the amount insured according to the consumer price index. • Unit linked Term Assurance: The premium paid by the insured are allocated to purchase “units”. If the value of the limits is higher than the amount defined at the inception of the policy, this surplus is paid to the insured. • Money back Policies: In case of a death, the amount insured is paid to the beneficiary of the policy. If the insured survives at maturity date, the premium is refunded.

32. Whole Life (Straight Life) Policies • Whole life insurance provide protection over one’s entire life time. • Paymentof the face amount upon the insured’s death regardless of when death occurs. • Terminal age in all mortality tables is 100 years. • Cash values are available by surrendering the policy. • Loan can be obtained.

33. Whole Life (Straight Life) Policies • For a $ 100.000, straight life policy issued at age 35, for example, the cash value may be $5.000 after five years and $12.000 after ten years, $28.000 after twenty years and $100.000 after sixty-five years. FİGURE: Joseph M Belth, Life Insurance a consumer’s handbook

34. Whole Life (Straight Life) Policies • Policies paying a set benefit ordinary whole life policies are certainly sold, however investment linked benefits are more common. Policies with profits (also termed “participating”), • Another variation is unit-linked cover. Once the number of units possessed known, the policyholder can quickly value the policy as the unit price is publicly quoted.

35. Whole Life (Straight Life) Policies • Universal Life Policies launched in USD in 1970’s and still a good product for emerging market. • It has two main characteristics: Transparency and Flexibility.

36. Whole Life (Straight Life) Policies • Transparency is achieved by breaking down the contract into its three components: • The protection component • The saving’s component and • The expense component • The second main characteristic is the “flexibility” of charging the face amount, premium payments and cash value

37. Whole Life (Straight Life) Policies • In general the amount of risk stays constant irrespective of the level of the cash value, so that the death benefit increases with the cash value. Sum at Risk Cash value Death benefit Duration of policy • FIGURE : Universal Life, Cologne Re, p.6

38. EndowmentInsurance • Endowment policies promise • the policy face amount on the death of the insured during • to pay the full-face amount at the end of the term of the insured services the term FIGURE: Diagram of Hypothetical Twenty-Year Endowment • Source: Joseph M.Belth, p.43

39. EndowmentInsurance Endowment policies may be diversified as follows: • Single premium endowment policies. • Retirement income policy: the amount payable at death is the face amount or cash value, whichever is greater. • A semi endowment policy-pay upon survival. • Modified endowment policy-provides for payment periodically. • Deposit term- First year premium were not to be higher than renewed premiums. • Juvenile endowment policies – designed to cover child’s education, marriage, and independence

40. EndowmentInsurance Those policies can be with profit or without profit. Cash value of the policy that is to say the mathematical reserves of the company is allocated for investment on financial instruments and real estates. The periodical (usually yearly) return of those investments is shared between the company and the insured at a defined percentage.

41. EndowmentInsurance • In unit linked policies, an investment fund is established and divided into “units”. Each unit has a daily value. The number of unit obtained by the policy owner and the value of each unit gives us total cash value. • The policyholder has the option of investing across various schemes, i.e. diversified equity funds, balanced funds, debt funds etc.

42. EndowmentInsurance

43. Pension (Retirement) Policies There are two main types of Pension products. • Defined – benefit • Defined contribution • In defined benefit, • the capital or the annuity to be paid at the maturity date is known. • The actuarial formula being used is the same as “defined capital” or “deferred annuity” formulas. • The increasing longevity of life and fluctuation of interest in the market may cause problem • Defined contribution product is an investment plan • Theinvestmentprinciple is almostthesamewithunit-linkedpolicies.

44. GOVERNMENTAL SUPPORT

45. GovernmentalSupport • The governments support life insurance due to the reason stated in chapter 3. • Additionally, life insurance serves as a complementary benefit to social security.

46. 2000 01 02 03 04 05 06 07 08 09 2010 GovernmentalSupport • Turkish social security has an annual institution deficit > TL 25b... • Total revenue and expenditure of Social Security Institution • Billion TL • Source: TSSRB; Shapingourfuture: 2023 visionforTurkishInsuranceSector, 2012, p.9

47. GovernmentalSupport • Therefore, long term life assurance and private pension has been considered as a third pillared of social security. • FIGURE: Life and pension as a supplementary Benefit • There are three types of governmental supports for long term life insurance

48. Regulations as toTransparency of Life Insurance • Each year the global economy adds an estimated 150 million new customer of financial services. • Even in well-developed markets, weak consumer protection and a lack of financial literacy can render households vulnerable to unfair and abusive practices by financial institutions as well as financial frauds and scams operated by intermediaries. • At its heart, the need for consumer’s protection arises from an imbalance of power, information and resources between consumers and financial service providers

49. Regulations as toTransparency of Life Insurance • A financial sector should provide consumers with: • Transparency by providing full, plain, adequate and comparable information • Choice by ensuring fair, non-coercive and reasonable practices • inexpensive and speedy mechanism to address complaints and resolve disputes.

50. Financial Transparency • Insurance companies have a great importance • by alleviating the financial hardship if a covered risk takes • by giving a considerable amount of saving, providing financial security