INTERNATIONAL OFFSHORE LIFE INSURANCE FOR HIGH NET WORTH INDIVIDUALS ( HNWIs )

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1 INTERNATIONAL OFFSHORE LIFE INSURANCE FOR HIGH NET WORTH INDIVIDUALS ( HNWIs ) Presented at the Caribbean Actuarial Association Conference Trinidad & Tobago 2-4 December 2015 Nari Persad, FCIA, FSA Eckler Ltd.

2 Introduction High Death Benefit ( HDB ) policies: Policies with a death benefit in excess of USD $2 million Typical policies USD$10 to $50M, and as much as $100M HDB Policies Purchased by the Following: High Net Worth Individuals ( HNWIs ); net worth USD$1M (excluding personal residence) Ultra High Net Worth Individuals ( UHNWIs ); net worth USD$50M Some corporations as Corporate-Owned Life Insurance ( COLI ) for key man insurance HNWIs Highly mobile Possess global business interests 2

3 HNWIs Seek Portable insurance coverage - Not tied to their place of residence - To protect the assets Introduction For example, Argentina seizing USD assets Tax-compliant policies - Important in US, Canada, the UK, Japan, and some countries in Latin America like Mexico and Chile Increasing Demand for HDB Capacity Brokers have been requesting it, particularly after the 2008 recession - Shift the investment risk to the insurer to protect their assets with a life insurance policy (guarantees of return and/or capital) Accelerated Growth in Global Personal Wealth Will drive an increase in demand for HDB policies 3

4 The Market Global Personal Wealth Has Doubled Since 2000: USD $263 trillion in 2014 North America accounts for roughly 35% of global wealth, yet it only has 6% of the population: Figure 1: Wealth and Population by Region 1 1 Source: James Davies, Rodrigo Lluberas and Anthony Shorrocks, Credit Suisse Global Wealth Databook

5 The Market The US: The largest increase in number of millionaires (+1.6 million) The UK: The largest proportional increase (+31%), next Spain (+24%) Figure 2: Number of Millionaires by Country Ibid 5

6 Why the Need for Life Insurance? Part of the Financial Planning Process Multi-millionaires Even billionaires Estate Tax Planning Applicable in many countries International business owners - Funds tied up in ownership of businesses - A $100M business value may generate $25-50 million of tax bill at death UK taxation on Foreign-Owned Real Estate Stamp duty and capital gains triggered at death Especially problematic for London s high bubble prices Forced Heirship and Inheritance Protection 6

7 Exists in Many Countries Forced Heirship A feature of legal systems (civil-law, Sharia h law, etc.) Percentage of the Deceased s Assets Transferred to Next of Kin Sometime just to sons, not daughters Testamentary freedom is limited Include Major Countries France, Germany, Italy and Spain, among others In most Latin America countries Japan and Russia In virtually all Muslim countries Not recognized in Australia, Canada, China, England, Hong Kong, Ireland and Wales, and in the USA except the State of Louisiana The laws change frequently 7

8 Forced Heirship Example Successful Family Business Business Owned by a Parent - Funds tied up in shares in the business - $50 million value Two Children - Daughter In charge of operations, completely involved in the business - Son On Death Irresponsible, not involved at all, would squander the family business Business will go to the son Solution 8 Buy a $50M life insurance policy, with daughter as beneficiary Side agreement whereby the son sells the business to his sister for $50M

9 Mortality HDB Policies Considerations Medical underwriting extremely stringent Empirical evidence shows mortality 60% regular insured Financial underwriting Key component Can be more complex, particularly if a corporation is being considered Insurers exercise high levels of due diligence to mitigate money laundering risk Lapse Rates Much lower than regular business 0%-2% versus 5% to 15% annually 9

10 Acquisition Costs HDB Policies Considerations Significantly higher than for regular business: 10x to 20x Administration Costs Significantly higher: 5x to 10x - Few highly paid administrators - But number of policies very low 1,000 policies would be considered a large carrier Returns depends on the type of product Fixed Return UL riskier to the insurer, therefore requires higher returns Unit-Linked UL riskier to the insured, therefore requires lower returns 10

11 HDB Policies Products Almost Exclusively Universal Life, Sometime Term Three Major Offerings Fixed Return Universal Life ( FUL ) - A credited rate is declared periodically, e.g. 3%-4% - A minimum lifetime credited rate usually offered, e.g. 1.5%-2% - Funds invested in relatively safe assets (sovereign bonds, investment-grade corporate bonds, maybe pref shares and commercial mortgages) - Funds usually controlled by the insurer (internal or external), not the insured Variable Return Universal Life ( VUL ) or Unit-Linked UL ( ULUL ) - No minimum credited rate - Returns fluctuate continuously - Funds may track indices, like Dow Jones, NASDAQ, FTSE, etc. - Funds usually controlled by the insurer Private Placement Life Insurance ( PPLI ) 11

12 Private Placement Life Insurance ( PPLI ) Very Popular in HDB Insurance Market Typically: Death Benefit = Face Amount + Fund (Option B) Similar to VUL / ULUL Main difference is the underlying fund(s) The fund(s) can be created from almost anything - Personal company s shares - Commercial real estate - Options in shares purchase - Anything that can reasonably be valued Fund(s) typically controlled by the policyholder, not the insurer 12

13 Premium Payments Lifetime annual premiums are not typical Limited-pay annual premiums Usually used for tax compliance products - Failing compliance will result in the policy being classified as an investment vehicle US Tax compliance: minimum 4-5 years - 3 major tests (GPT, CVAT, non-mec) Effect is to limit the tax-free accumulation of funds Canadian Tax compliance: minimum 8-12 years Other jurisdictions also have compliance requirements - e.g. UK, Japan, etc. Single pay Very much the normal type if tax compliance not an issue 13

14 Attraction of the HNWI Market Services Associated with HNWIs Tend to Have Higher Profit Margins HNWIs tend to be service and results oriented - Price-inelastic Much Higher Average Size of Policy Efficiency based on number of policies (service) Significant source of income per policy Can lead to future additional business Typically Under-Served Market ~35 million millionaires worldwide Mis-understanding that HNWIs do not need life insurance 14

15 Attraction of the HNWI Market HNWIs Have High Inertia Minimize the number of relationship changes - They are too busy Complexity and size of the policy and contractual obligations - Not a trivial task to structure the life insurance policy and holding HNWIs Have an Expansive Referral Network Insurer can expect referrals of other HNWI clients 15

16 Challenges of the HNWI Market Sale is a Lengthy Process Choosing the insurer, including the domicile (different laws) Reinsurance capacity Process takes several months - Higher not taken rates HNWIs Inertia Increasingly sophisticated clientele Cannot be bothered once a solution is implemented New Business for HNWIs Financial services companies are seeking ways to distinguish themselves HDB life insurance is one of the key services - From both a client and distributor perspective - Delivering on its promise of service is key for a financial services company 16

17 Challenges of the HNWI Market Financial Services Firms Increasingly using an integrated approach - A team servicing HNWIs must include Financial planner General lawyer Tax lawyer Accountant Broker - Really one stop shopping A high quality service team requires high quality employees Only occurs if that employee perceives a high probability of success 17

18 Distribution Distribution Network (External to the Insurer) Always plays a key role in the success of any product Particularly evident in the HNWIs market High Quality distributors limited to less than 20 firms worldwide Distributors Are Very Focused On their referral network (private bankers, attorneys, accountants) On a limited number of insurers 2 to 4 18

19 Reinsurance Needs Large Insurers Also Require Capacity Sun Life, Manulife, Transamerica, Prudential (US) View this as an important market Retention can be as high as $10 to $20 million Many More Mid-Size and Small Insurers Caribbean - Antigua, Barbados, Bermuda, Caymans Europe - Guernsey, Ireland, Liechtenstein, Luxembourg, Switzerland Maximum retention - Usually between $100,000 and $1 million 19

20 Reinsurance Variety of Structures Exist in the Marketplace Large insurance companies have their own high capacity pools Some reinsurers have formed their own high capacity pools Typical Reinsurance Pool Structure Reinsurance premiums are on a Yearly Renewable Term ( YRT ) basis Facultative YRT rates are usually not set Executing the contract is lengthy Even determining available capacity can be a chore Proportionate shares are defined in advance, can lead to somewhat complicated and potentially higher costs Non-Typical Reinsurance Pool Structure 20

21 Reinsurance Pool Typical Reinsurance Proportionate shares determined in advance Static in nature, i.e. identical for each policy This can lead to uncertainty in available capacity and reinsurance costs In example below, Reinsurer R1 and R2 Proportionate Shares are 50% each and the Ceded Face Amount is $40 million 21

22 Non-Typical Reinsurance Some Pools Address Some of The Issues Providing more certainty for guaranteed YRT rates Accelerating the determination of available capacity Decreasing underwriting time Easing the burden of administration Decreasing underwriting costs renaissance An Eckler solution happy to discuss! 22

23 23 Questions

24 Thank You! Eckler Offices in Canada and the Caribbean FS.Eckler Eckler Financial Services