Vast Potential Awaits as Life Insurance Solutions Move Centre Stage in Asia Pacific
Feb 6, 2020
Life insurance solutions are on the rise in Asia, both in terms of importance and to mitigate pressures from the proliferation of global regulation. The increasing range of policy structures and solutions on offer in the region are progressively helping more wealthy investors consolidate assets and reporting in robust structures that provide security and future liquidity for their families. But private banks and wealth management firms are still not punching their weight in this sector, which can offer valuable diversification of revenues, which is especially important as competitive pressures build. EFG Bank and Hubbis held two private, off-the-record discussions on this fascinating market in Singapore and Hong Kong.
The Key Findings & Observations
Life insurance solutions on the rise
The range of life insurance solutions available for Asia’s HNWIs and ultra-HNWIs across the region has expanded significantly, yet there is still enormous unfilled potential in the market.
Private banks still not punching their weight
Private banks and other financial advisers continue to under-perform in terms of their closure of life insurance solutions. Potential clients need these solutions, but they span the spectrum from a few who are wise and proactive to the majority who are relatively ignorant of these solutions and inactive. That means there is an immense opportunity for experts in the world of wealth management.
The early birds catch the worms
A core problem for the wealth management industry, especially the private banks, is that they remain slow to raise these solutions with their clients, poor at engaging those clients with the relevant discussions, and unskilled at working with the insurance brokerage experts to turn prospects into closures.
Regulatory changes driving additional demand
Aside from the well-documented increase in the focus of HNWIs and their families on estate and wealth planning and transmission, the global regulatory environment, especially with the rollout of the Common Reporting Standard (CRS), is driving the consolidation of assets in robust insurance structures and facilitating simplified reporting protocols.
RIP privacy and secrecy
In the new world of transparency and regulatory rectitude, and in an increasingly global and cross-border world, the background is more conducive for an exploratory insurance discussion at a very basic level, which can then lead rapidly to some more sophisticated analysis of the options on offer.
Know your limits, both in expertise and for compliance
It is the insurance brokers who should be conducting the analysis of the options for the HNWIs and laying out the structures and solutions available. The private bankers and other wealth management advisors should only be the spotters and introducers but are not licensed to actually sell the insurance solutions.
Keeping things current
Wealth and insurance structures and planning also need reviewing continually and when necessary adjusting. The bankers and wealth managers should keep on top of their clients, should aim to understand their assets and their families and help tailor their suggestions to help those clients keep their solutions current and fit for purpose.
Listen, learn, then act
The assembled experts at the discussions stressed the vital importance of private bankers and advisers listening to their clients, rather than simply talking or trying to provide what the relationship managers (RMs) might think are the right solutions. This will help them pitch the discussions at the right time and level to engage the client and potentially the family in a discussion on insurance as an asset class, after which they can introduce the brokers to define solutions and hopefully convert those clients.
Dialogue as the differentiator
RMs are encouraged to engage their clients in broad-based, holistic conversations, and to aim to be relevant to the different generations. Talk to clients about relevant big issues, including privacy, asset protection, tax planning, estate planning and liquidity, which will all help clients talk about their personal and family situations and needs. If they can do so, the RMs will really begin to differentiate themselves.
Connect across the generations
Private wealth in Asia is already largely shifting to the second generation, and the future of wealth management institutions is vested more there today, and also with the third generations. The wealth management industry must therefore accurately shape their discussions to these generations and make life insurance solutions relevant to them, either as policyholders or as beneficiaries.
Understand the needs
The experts at the discussions conceded that too many people associated with the insurance sector in the past decade or even beyond have been guilty of not doing enough needs-based analysis. This has been changing, as a far greater range of products become available that are designed to be more relevant to individual needs.
Tailored solutions from the professionals
Accordingly, there are today more life insurance products and solutions available to Asia’s HNWIs than ever before. RMs must understand the basic structures and their idiosyncrasies in order to have the preliminary discussions required. The brokers and insurance providers can then mine deeper and offer the best structures for the particular client’s needs and expectations.
Pick your acronym
The Asian market for many years was dominated by Universal Life (UL), but as interest rates have collapsed year after year those deals are far less appealing, and structures such as Variable Universal Life (VUL), Private Placement Life Insurance (PPLI), Whole of Life, and other solutions have risen in appeal.
Some UL policies might even be unfit for purpose today
With crediting rates going down, and in an interest rate environment few ever thought would materialise, UL policies are affected, and some clients are even terminating their UL policies and replacing with other insurance structures, especially Whole of Life, and sometimes even saving money and boosting coverage in the process.
Hong Kong can offer an excellent entrepot for insurance
There is a broad church of expertise in life insurance solutions in Hong Kong, and many consider the regulatory environment there second to none for such solutions, given the regulatory approach to capital and other requirements for the insurers.
Building niche products up to mainstream offerings
Life products such as PPLI and VUL are still relatively new to Asia, whereas PPLI, for example, has a more than 50-year history in the US. Bankers, intermediaries, advisers and HNWIs should see these solutions in that context, rather than being wary of them as new entrants to the market, which they are certainly not.
Diversifying your revenues
As private bank revenues are under intensifying pressure, insurance is a very useful way to bolster and boost those revenues. Moreover, the clients who take up these solutions are taking on policies that help solve liquidity planning, succession planning, and inheritance tax planning, in other words, that offer the clients peace of mind rather than further exposure to the volatility of global financial markets.
An expert opened the proceedings at the first of the gatherings by briefly highlighting the growing importance of life insurance solutions for Asia’s HNWIs and ultra-HNWIs, as well as pointing to the enormous unfilled potential the market has.
“While many private banks have strong pipelines in terms of insurance cases, for example,” he reported, “the level of closures tends to be very low. One possible reason when we looked at this is that engaging brokers for wealthy clients, especially the follow-up stage, has been very slow, but there are, of course, many other reasons.”
He added that it is therefore vital for bankers and advisers not to be shy of introducing insurance solutions as early as possible, well in advance of health or other problems that might suddenly arise.
“My message for you here today is therefore to follow-up closely and thoroughly, and do not wait,” he said. “You never know, as perhaps when you feel ready, the client may not be ready, or the situation does not permit the solution anymore. Our value as private bankers in this sphere is, therefore, to really help clients uncover their insurance needs and bring in the broker, who will be in a better position as well as knowledgeable enough to introduce different and appropriate solutions for different clients.”
Regulatory changes galore
Both of the gatherings saw the experts focus intently on the proliferation of regulations as a starting point for the discussions. They remarked that especially CRS is a gamechanger, which they said can only be ignored at huge risk to clients, advisers and the firms they represent.
Another expert summarised that the common theme of the discussions was that the wealth solutions discussion covers the same fundamentals as in the past, but that today a far larger part of that discussion is now around tax, regulatory and CRS issues.
“For example,” he commented, “in the past, you may talk to a client about a particular insurance solution, and the focus of the discussion would be about that solution. Today there is a lot more focus on the tax implications and the pay-out from the insurer on the accumulation of value, and then what the CRS reporting should look like.”
Even in markets such as Malaysia, where there is no tax due on offshore assets, the authorities are now receiving information from other jurisdictions, for example, Singapore, and asking individuals how they came to have the money or assets offshore in the first place.
In other markets in Asia, the discussions might be more around how money moved offshore when there are exchange controls in place. In short, the whole game has completely changed, but the reality today, commented the experts, is that clients span the spectrum from wise and proactive to clueless and inactive. And therein lies the opportunity for smart private bankers and wealth managers who can pull their clients into the real world.
Gone are the days of secrecy
A law firm representative with expertise on the US tax environment commented that gone are the days of banking secrecy when clients could expect to pay little or even zero tax.
“Transparency now rules,” he said, “and what we are looking at now is efficiency within the law, and that is an easy entry point into the insurance discussion at a very basic level with term life insurance, something that comes up very often when we are doing planning with clients. When clients don’t want to burden the second or third generations with the liquidity issue, term life insurance is a nice way to plan ahead for that, and it's an easy entry point into an introduction to a broker and they can start that conversation that flows from there. Accordingly, I think there is a good connection between subject matter experts that are advising clients, and then the introductions to brokers and insurance companies.”
With that, he offered an example of a typical client, who might be a patriarch located in Hong Kong, with a business operation in Mainland China, his wife’s family from Taiwan, a son at Stanford, a daughter at Oxford, with bank accounts in Switzerland, Singapore and Hong Kong and perhaps a vacation home in Australia and another in Canada.
“That is a lot of jurisdictions and many different regulations to try to deal with,” he remarked, “and any time the US and UK are involved, things get very complex, very quickly. We can opine from the US perspective, but we are also part of a legal network called the LexMundi Network, which has a representative firm in every country, so we can make referrals. And we connect to the private banking and trust community to help educate them to help their clients about these important issues and pitfalls, as clients can no longer hide behind banking secrecy, and these clients are seeing this all the time, as peers and others fall foul of the authorities.”
The discussion has become a lot more complicated, so it is important to also bring in the right specialists to the client, and it is therefore vital to ensure you have the right business partners to work with. “The banker cannot handle the entire spectrum of solutions and advice,” said one guest, “but he or he can set the context and can work, as we do, in open architecture to bring in the right advisers, experts, brokers, other business partners, to meet the client’s requirements.”
Keeping things current
Another guest added that structures and planning also need reviewing continually and perhaps adapting every five to 10 years at least. “You wealth managers here today can help clients by just being aware of changes from a jurisdictional perspective, but knowing what countries your clients have interactions with, where their kids are residing, where they are structuring from a company perspective or a life insurance policy perspective, and so forth.”
A guest highlighted how clients often have complex situations and requirements but need solutions that are as simple as possible. He quipped that his firm cannot solve the age-old riddle of death and taxes but can help to remove or alleviate some of the pain and fear, by smart and rigorous planning and all within legal parameters.
Another attendee agreed, adding that they promote insurance as a wealth holding structure. “Consolidation is certainly key,” he said, “It allows the client to bring all his assets together, it is a very clear line from CRS, it makes it very simple. Insurance can be confusing, clients can shy away, but seeing it as a means to wrap all the assets in a robust structure is helpful.”
The discussion then also migrated to cover residence and citizenship planning. “There are many reasons to consider investment migration,” said one expert in attendance, “from planning for the children who might want to study and live overseas, to changing country in retirement, or splitting time and homes between countries and so forth. Clients typically come to us with a specific need in their minds, and we have the experience and expertise to guide them carefully through this, with transparent charges and handholding the clients and families from start to the end. We work with many bankers to help their clients in these matters, and we are entirely transparent. Insurance solutions can often go hand in hand with residency and citizenship planning.”
Getting the act together
The experts also focused on the importance of listening to the clients, rather than simply providing what the relationship managers might think are the right solutions.
“Fact-finding with the clients is vital,” said one attendee, “so the skills of an accomplihed RM will allow him to engage the client in questions and then conversations that make them truly think about their situations. And across Asia, there are many client structures in place that are overdue for review and amendment, and adding insurance to the overall client picture is very valuable, so engaging the client and family in a discussion on insurance as an asset class is a good start, followed then with more detailed conversations in later sessions.”
“If as bankers, you have these types of conversations,” added another expert, “you can really differentiate yourselves.” Another guest concurred, adding that the client’s total position in terms of wealth, preservation and succession is the umbrella mission for any private banker worth his or her bonus.
“But the most important mission for the private banker,” another guest observed, “is to acquire clients. After all, the job of the bankers is not to sell insurance, that is the job of the insurance brokers. Their job is not to manage the clients’ money, that is for the portfolio managers or the investment advisers. No, actually bankers need to acquire clients, but they often hate doing that because it is so tough.”
He advised that the younger generations of bankers need to use tools of their age, the digital tools, social media, other skills and ways to acquire clients. “Your clients will say they can refer other clients to you, but of course they are always too busy, so instead try to can use their social and business site media to connect to their connections. In short, be entrepreneurs, acquire clients, this ultimately is your job.”
Another guest said, however, that when clients do indeed refer other clients to the bankers, the process is one of affirmation of confidence in the character and abilities of that banker. “You will then not simply be having a conversation in a void,” he remarked, “as you will have been recommended and that means your institution as well, so that is a very good start. And adopt a three-year plan for your own business as RM, so focus on conversations about planning, so important especially while so many banks are still locked into product pushing.”
Listen, learn, differentiate
But, he added that with this kind of holistic conversation, they currently have one or two years where there is a real opportunity to change the quality of the dialogue with their clients and to really differentiate themselves.
Nevertheless, he also advised against bankers talking too much. “Bankers need to listen more. If, for example, you are having an interview make sure that the person who is interviewing you does a lot of talking, telling you about the strategy for the business, as the more someone talks, the more they feel they are achieving. So, with clients, just make sure you listen and get the clients talking. My analogy is that the clients should be the wind and the sails and the banker the hand on the tiller, steering the conversation. In that way, you might be surprised as the more you listen, the more you learn and the more opportunities you uncover.”
Insurance has become an increasingly important part of the portfolio of wealth planning tools that clients utilise today. “To achieve the goals for the clients, as wealth management professionals, we need to take time to sit down with the clients, understand the complexities that they have and how those complexities expand with time, particularly when the clients pass wealth to the next generation, where individuals might reside in the future, and so forth,” said one guest. “Complexities are great because we can use our skills to draw out these matters in the conversations, and then hopefully add value.”
The RM, or client relationship officer (CRO) today is not only an investment adviser, he is also somewhat of a psychologist, another guest observed. “When we talk to clients about privacy, asset protection, tax, estate planning and cash liquidity, then we see clients opening up and talking about their personal and family situations and needs. Listen, and the discussions will evolve naturally in these directions.”
“Today we are talking always about tax efficiency, and no longer zero or extremely low tax,” a fellow panellist added, “so term life insurance is always useful as an entry-level point, a great way to start the conversation. Of course, we aim for the structures to be as efficient as possible, but the key is for the provision of cash liquidity for the next generation so that they are not caught out. This can then often lead to more complex discussions on further asset shielding, US estate tax exposures, UK inheritance tax exposures, registries in various jurisdictions, and so forth. I guess you are looking at basically a tree – the term life discussion – and then all the branches that sprout off the tree.”
But there are dangers of overstepping the boundaries that regulators set out. “We must also at the same time recognise that bankers are not licensed to sell such insurance products, and in some markets, for example, Indonesia, the penalties for selling a non-registered life insurance product is 10 years in jail, in other words very serious indeed,” commented one attendee. “So, I would say the banker can start the general discussions, but should not approach the clients directly in terms of individual products, as that is tantamount to starting the solicitation. You can however, for example, focus the clients on the need for liquidity in anticipation of events later in their lives, while steering clear of talking specifically about products themselves.”
Reaching out to the NextGens
The discussion turned to the need to bring future generations into the fold of actual or potential clients. “We have seen plenty of situations where the first generation did a lot of complex structuring for the second and third gens, but did not consult them, which can result in unravelling and inefficiencies later on. It is absolutely vital therefore to impress upon the first generation to include the younger generations, especially as FATCA and CRS make that an absolute necessity.”
He then offered an example where distributions from an estate to a grandchild beneficiary to help with education had unwittingly triggered the recipient to be considered as the controlling person of the structure, thereby resulting in a report to his home jurisdiction listing the total amount in the trust, not just his distributions. “The grandson then knew that there is USD50 million in the trust, so it is better to have the conversation early, rather than be shocked by things later on.”
Another guest added that from an insurance perspective, most policies have a nomination of beneficiary (NOB) function, so it is important to make the beneficiary aware that there is a policy and that they could at some point receive benefit, so broadening the conversations like this is important.
“To acquire the younger generation clients,” he remarked, “we also all need to be a little more adaptive in our approach in engaging with them because the traditional private banking model doesn’t deal well with them as yet, quite frankly. They are used to obtaining information online and rapidly, for example, so given this different dynamic, we need to be better informed. Accordingly, we need to align yourself with business partners that are experts in their field, build a network of specialists and then be able to answer the questions from the NextGens, because they demand more, they will expect more knowledge and they will expect more immediate results, they find it tough to understand why things might take more than a day to sort. We also need to educate them to the value we offer as an industry.”
Another guest, a very senior ex-banker, noted that the NextGen is already mostly the third generation. He said many of the founders in the region, the Taipans, the patriarchs, had passed away in recent years.
Looking to the future
“The second generation is already in-charge and has very often been running the business and the wealth for the last 10 to 15 years I would say, and the third generation is in their 20s and 30s, and it is they that stand to lose if things do not go well. These millennials are very different, their relationship with money is different. They very often do not want to work in the business, which is becoming more professionally led. Same with the family investments and assets, which is now often managed by multi- or single-family offices, or the private banks.”
He added that the relationship with this third generation is very important because as we know evidence from the US shows that it is often the third generations where family wealth can dissipate. In the US, he said, the indication is that 90% of the wealth is lost by the third generation.
Another attendee commented that the older generations tend to be more concerned about preservation and succession and what happens to the family business, while the younger generation is typically much more interested in business start-ups, more interested in technology, more interested in social impact and sustainability, more interested in philanthropy. “The buttons you need to press are different,” he said. “So you need to perhaps bring a slightly different approach. If are genuinely an entrepreneurial type bank, and if you can press that entrepreneurial button with the next generation, then you could be uniquely positioned to hang on to the successive generations of clients.”
“In my view,” came another voice, “the primary reason younger generations often don’t want to work with their parents’ banker is not that they have an aversion for them, but because they don’t know them. Accordingly, it is critical to be engaged early on with the next generation, and in my view, these kind of discussions around wealth planning are the key avenue for that, as a means of engaging the whole family, and not just with the patriarch.”
Turning the discussion to the many challenges for the private banks, an expert advised that there are several areas to focus on to improve returns. Cost is the obvious first point of call, including rationalising producers to cut out the lowest percentiles, improving efficiencies and exiting non-profitable activities. Another area is to provide clients with differentiated products and solutions, and this is where life insurance products certainly hold a key that adds to the client’s solutions and addresses specific needs that the client has.”
Surveying the diverse solutions on offer
The discussion turned to the particular life insurance solutions, with this segment focusing on the confusion that so many clients have about the structures and what all the acronyms actually mean, such as Universal Life (UL), Variable Universal Life (VUL), Private Placement Life Insurance (PPLI), Whole of Life, and so forth.
Another guest conceded that many in the insurance sector in the past decade or even beyond have been guilty of not doing enough needs-based analysis, and then allowing UL to dominate the game.
Having said that, this same expert zoomed in on the products, noting that VUL is in his view a subset of PPLI. “The difference between the two really is that private placement life insurance is sometimes regarded as ‘101 insurance’ because the life cover can be very small, although tax jurisdictions will increasingly look at these as more tax avoidance schemes potentially, so we think a better idea today is to have some larger element of life insurance in there, a chunky life insurance on top of your assets.”
He added that with PPLI generally, the enhanced life cover on top of PPLI is really your portfolio with something like a whole of life policy or a term policy sitting on top so that real-life cover sits on top of the portfolio. “With VUL,” he noted, “it is similar except you have contracted for a fixed amount of life cover. Your portfolio sits underneath and as it goes up your sum at risk is variable and will diminish over time and it could even become zero. So, VUL is just a variation of the PPLI, with life cover.”
He explained that UL is similar to the whole of life in concept but the risks are different – whereas the whole of life policy can give a guaranteed pay-out, the UL policy is a moving target, with the projection based on estimates about mortality challenges, about crediting rates. “The internal rate of return on UL policies is very high if you die soon, but very low if you live a long time,” he added. “Clients therefore have to really understand that, so it is a very complex sale, and if it goes wrong, you really don’t want to be castigated by the client as the person who brought that to them.”
“UL is good but does not neatly match all the clients, and moreover some of them will not have performed so well, and just when people in the 70s or 80s need them, they will hear their policy needs topping up, or it will run out. With crediting rates going down and in an interest rate environment, we never thought we would see, UL policies are affected. So, I am pleased to see good firms talking about PPLI and VUL structures, and we are seeing a major move, albeit late and only in the past two or so years, to whole of life.”
He noted that the premiums are about the same as UL, but the whole of life cover will endure. “And that is critical,” he explained, “because whether for liquidity planning or succession planning, or estate planning at the time of death, we must be sure the protection is in place. Well, whole of life offers exactly that.”
He explained further, noting that not only with whole of life, unlike UL, the cover actually increases, so a USD20 million of cover might in 20 years be USD30 million, while UL would remain at the lower figure, or even drop below that.
“Indeed,” he reported, “in the past year we have also been seeing a key trend of UL policies being cancelled in favour of whole of life. And while we as a firm don’t offer PPLI or VUL, I think it is very positive to see there is a bit more of that. In short, when it comes to protection, there is always a need, there is always an opportunity, whether medical, term life or whatever. We need to have these conversations, listen to the client, and the more we do that, the more needs will come out and we can then match those needs with the different insurance solutions can offer.”
He added that policies need to be talked about differently from other financial assets. “Whole of life,” he explained, “is basically a product for investment, and UL is definitely part of the portfolio, but PPLI should be pitched more as a structuring solution, generally in combination with trust, therefore not only as part of a portfolio, but also as a consolidation of the assets.”
The discussion moved on to the new regulatory framework for insurance in Hong Kong, with an expert explaining that the objective is to eliminate grey areas of interpretation, including the suitability of the product, capital reserves, reporting or other areas, including multi-jurisdiction. “The government and the regulatory construct recognise that it is in the client’s best interest to get those things right from the outset,” he remarked.
“When it comes to PPLI or VUL there is great expertise in Hong Kong,” he continued, “and the best whole of life solutions available, I believe, and the same with the guaranteed life savings plan. Actually, Hong Kong insurers have a benefit over all the other insurers around the world, due to capital and regulatory requirements here versus for example Singapore or Bermuda, as those jurisdictions will require the insurance companies to put a lot of cash aside, which means there is less money working for the clients. The whole of life solution offers a better price, better guarantees out of Hong Kong, and the same with a guaranteed savings plan.”
An expert highlighted the implications of switching from an older UL policy to a new whole of life or other policy. “As time moves on and people age,” he noted, “the individual is unlikely to get the same rating as five or even 10 years earlier, but we do see cancellations and switching, as whole of life cover lasts forever and the cover increases.”
For example, he cited the case of Japanese clients, with inheritance tax of 55%, for whom it is absolutely critical that the cover endures to the point where the liquidity is available exactly when the family need it most.
His advice was therefore for policyholders and wealth managers to speak to the brokers, to obtain up-to-date policy valuations on their policies, in order to determine the best course of action. “The fact of the matter is universal life was designed with crediting rates at 3% to 6%, but these are going ever lower and lower, making other solutions, especially whole of life considerably more appealing,” he added.
Another expert remarked that products such as PPLI and VUL are relatively new to Asia, whereas PPLI, for example, has a more than 50-year history in the US. “These are niche products, growing in popularity,” he commented, “as they so well meet the needs of the clients. Even the big brokers out here have very few people who really understand the structures and how to work the different angles of PPLI and VUL.”
And he reiterated an earlier view that the private bank RMs need to be careful not to get too much into the advice, they need to be passing that role on to the brokers. “They can have a relationship with the insurance companies,” he noted, “but should be careful not to get too much into the insurance advisory with their clients.”
Another expert added that clients must understand the downsides of products as well as the upsides. “We develop a professional bond,” he explained, “we understand that our role is to speak honestly to the client, not to try to pitch a product. Consequently, the banks, the RMs, the wealth managers need to be introducing clients to proper advisors, who also fully understand the implications for liquidity of different tax and inheritance regimes of different jurisdictions. Thailand now has a 5% inheritance tax, but very probably that will increase. Korea has 50%, Japan has 55%, the US has 40% and many clients are not always 100% aware of where they are exposed. So many Asian clients have UK property, or had before, and might have IHT exposures, even if they had put in place structures before.
Rationalise, focus and seize the opportunity
A guest underlined the vital need for wealth management professionals to show both enthusiasm and commitment. “If you achieve for your clients,” he said, “you will win their other business. If you go to one client and ask them to refer to you one other person, you could in theory double your entire business. And I would also encourage you to get rid of the clients that you don’t like, who are the most annoying, so you can focus on the good clients in the old-fashioned way, so you are freed up and you can add more value to the clients that you enjoy working with and of course preferably the ones that have the most money!”
The final comment to the Hong Kong gathering from one insurance specialist was that as private bank revenues are under intensifying pressure, insurance is a very useful way to bolster and boost those revenues.
“And the great thing is you are actually doing the right thing for the client,” he added. “The market is moving on and whole of life is rising in prominence as a solution that covers liquidity planning, succession planning, and inheritance tax planning. And the good news from a Hong Kong perspective, you can get better solutions in Hong Kong with whole of life and guaranteed savings plans than anywhere else in the world, so that is a great opportunity.”