Life Insurance in Demand Despite Less Confidence
While only around half of private individuals believe that life insurance companies will be able to meet their guarantee commitments over the long term, full insurance solutions with guarantees are in great demand in the occupational pension plan sector, with small companies often relying on this model, according to the first life insurance study published by the professional services firm Ernst & Young.
There is a need for the insurance industry to act in order to restore the lack of confidence, the study shows.
This life insurance study is based on a representative survey that was carried out on behalf of Ernst & Young in October 2011. The independent market research institute Valid Research in Bielefeld surveyed 500 private individuals and 500 SMEs in Switzerland; the people surveyed in the SMEs were either managing directors or heads of accounting.
Life insurance a major part of retirement provision
The survey shows that almost 85 percent of people surveyed viewed private pension insurance as an important part of financial retirement provision, irrespective of age and gender.
However, the actual distribution of life insurance products was lower, with only 70 percent having their own private insurance or pension product.
“This discrepancy is explained by the lack of trust in the insurance companies among those surveyed “, said Hans-Jürgen Wolter, Partner and Head of European Actuarial Services at Ernst & Young.
According to him, the current financial and economic environment is also significantly contributing to the uncertainty.
In a direct comparison with bonds and equities, only around 60 percent of people surveyed viewed private life insurance as a safer investment, although policyholders have much greater protection in terms of regulation and in particular under the solvency provisions (Swiss Solvency Test, EU Solvency II).
Only 54 percent of those surveyed believed that insurance companies would be able to meet their guarantee commitments over the long term. In view of the long-standing financial crises, what matters today is security: 84 percent of private individuals surveyed preferred a guaranteed interest rate and guaranteed capital over a higher return.
Private pension insurance schemes represent an important supplement to the first and second pillar system, around 40% of those surveyed had additional old-age cover.
SMEs relied on full value insurance solutions
The analysis of data on occupational pension solutions shows that 44 percent of SMEs have a affiliation contract with an insurance company. In this regard, full value insurance solutions are extremely popular: 93 percent of companies surveyed rated the system – which does not permit any underfunding and where the companies are not exposed to any risk – as positive or very positive.
“Full value insurance solutions are in demand again in these uncertain times”, said Thomas Brotzer, Partner Insurance at Ernst & Young. He does not expect this to change in the near future.
Guarantees of pension payouts are of paramount importance: 97 percent of SMEs surveyed regard the financial strength and guarantee of pension payouts of the full value insurance schemes under the second pillar as important or very important.
High returns are no longer the main priority, with more than 80 percent of SMEs placing greater emphasis on a guaranteed interest rate and the guaranteed repayment of capital paid in (no underfunding).
In practice, smaller companies rely on insurance companies’ full value insurance solutions; only 30 percent of small businesses would be able to provide additional funds if the benefits scheme were to be restructured. Every seventh such scheme of the SMEs surveyed had to be restructured in the past five years. Most often, employers and employees had to pay in additional contributions; other restructuring measures required a waiver of interest on retirement assets and a reduction in the conversion rate for new pensions.
Despite the upheavals in the financial markets, 90 percent of SMEs surveyed rated the financial strength and security of their pension scheme as good or very good. However, confidence in the long-term future was limited: only 60 percent of those surveyed believed that insurance companies would be able to meet their guarantee commitments over the long term.
The importance of guarantees was also shown by the fact that SMEs would be prepared to pay more for them. However, small companies with a greater reliance on guarantees were less prepared to bear the higher related costs.
While the long-term assessments may be inconclusive, 87 percent of SMEs surveyed were happy with their current pension solution and would recommend them to other companies. Even the annual financial reports that pension schemes publish were rated as good by 89 percent of SMEs, with 94 percent being satisfied with the quality of advice and information from their pension scheme.
The problem with terms and conditions of insurance
Comprehensibility and transparency of insurance products were seen as good by private individuals and SMEs alike. Individuals regarded the readability of the general terms and conditions of insurance as deficient, for SMEs the same applied to the readability of the terms and conditions in affiliation contracts; these aspects were rated as unsatisfactory by half of those surveyed. 37 percent of private individuals had very little understanding of product descriptions.