Changes in Insurance Technique

One of the most striking characteristic of unit linked insurance is universality, since a unit linked insurance can be viewed as a very general life insurance containing all possibilities. The name of the American version (Variable Universal Life) probably tries to imply this through the word “universal”. From this respect we can say that – as we have hinted earlier in this chapter! – that unit linked can be viewed as a generalisation of traditional life insurance, where many restrictions have been resolved and made optional, variable.

Universality also means that the insurer is able to satisfy all insurance needs of an insured within one policy.⁸⁶ Internationally there are examples of insurance companies selling only one product, a unit linked insurance. When an insurance company is offering several Unit Linked products, this is probably because of marketing reasons, and is deliberately not exploiting all possibilities provided by the flexibility.

Universality necessarily means also that compared to traditional insurance it has much more features in common with non-insurance financial instruments, so the boundary line between life insurance and other financial areas is starting to fade, not in the least thanks to unit linked insurance.

A more even expense structure brings a kind of stability into the expense structure, since the expenses debited to the insurance follow more closely – compared to traditional insurance – the actual incurring costs. At the same time the flexibility of the design brings a new type of instability into the cash flow of the product, since the client has more options of premium payment, can choose the timing and sum of premium payment, this way the cash flow into the insurance company is – compared to traditional insurance – much less calculable. Naturally this depends strongly on the type of clientele of the insurance company, if it is middle class with stable income with a disciplined accumulation ethos, or recruited from other classes. Knowing the characteristics of the clientele is many times what motivates insurers not to use the flexible options provided by unit linked, and they deliberately set the premium timing and the sum to be inflexible, this way trying to make their cash flow more calculable.

Calculability might be important regarding the commission, too. If the insurer pays large acquisition commission (i.e. uses a traditional commission regulation), that is covered by future expected premiums, then it is important that this cash flow should be as stable as possible.

The death-risk premium variable over the premium term (when calculation is based on a new, more precise mortality table) also brings the insurer closer to a more stabilised cash flow.

It is very important that unit linked insurance can only be managed with a modern, large-capacity computer background and sophisticated software. This also caused that (and not only because of the lack of a properly developed stock market) in an average Hungarian insurance company this type of insurance product could not be introduced at the beginning of the ‘90s. The most important requirement from this

86 Moreover, even the insured person could be modified, which would principally make a unit linked insurance even inheritable, so it would be able to satisfy the life insurance needs of the insured’s descendants.

point of view is the daily valuation of reserves broken down to the level of individual clients.

Insurance companies selling savings type insurance are important players of the financial intermediary system, since a significant part of those having excess money and those who want to use this money meet each other through life insurers. In case of the traditional (savings) life insurance the insurer itself as an institution raised a wall between these two groups, they could only meet with the active participation of the insurer. Although the insurer gains the interest credited to the premium reserve of the savings type life insurance from the investment yield of this reserve, he appears to the policyholder as an individual guarantee undertaker.

Through unit linked those offering and those seeking money meet almost directly, the insurer “only” brings them together, and (generally) doesn’t guarantee anything on the performance of those demanding/using the money. In this respect the financial intermediary position of insurers weakened compared to the former. This seems to fit into a general tendency: the role of the stock market is increasing – that is the meeting point of the demand money and supply of money – and the role of traditional financial intermediaries is decreasing (banks, life insurance companies). If this tendency truly exists, unit linked insurance can be the forerunner of a life insurance sector with a completely changed function, where the new function of life insurance is much more counselling, individual financial planning and giving aid in the realisation of plans than financial mediation itself.

The weakened financial intermediary role of life insurers means at the same time a stronger and better asset-liability matching, since there is no better matching than when money owners and money borrowers are in direct contact without an institutional filter, since this institution may manage to invest in assets covering its liabilities, or it may not.

In case of traditional life insurance the insurer guarantees all benefit elements, so prospective reserve calculation is very important⁸⁷. On the other hand, in case of unit linked insurance the future maturity benefit is not known, the death benefit is also uncertain (if in case of a policy the value of all funds is higher than the death sum insured), and there is no insurer guarantee on the sum of these elements (excluding the death sum as a minimum death benefit). Because of this, benefits can be calculated only based on “historical” data of the policy, that is based on the retrospective method.

87 See section 12.! This is even stipulated by law.