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“The situation in the insurance sector is improving with the provision of unit-linked life insurance services to clients, but there are still many areas for improvement. We see room for insurers to reduce administration fees and look for higher returns Therefore, we will continue to constantly strive to clarify the practice of selling and managing investment insurance products to create greater added value for the Lithuanian population, “says Jekaterina Govina, Director of the Bank of Lithuania’s Supervisory Authority .
After analyzing the management practices of eight life insurance investment divisions of insurance companies, the results and taxes of the largest investment divisions by assets, the Bank of Lithuania drew attention to the practices to be corrected.
Investment management.
According to the report of the Bank of Lithuania, the process of selecting investment objects in insurance companies is often unclear. Insurance companies must establish criteria for the selection of funds and other investment vehicles in which the funds are invested. They should also explain how the performance of the investment directorates is monitored, which should include an analysis of the strength of the investment funds offered to the insured, the fees charged, the performance and the risk.
When evaluating the investment practices of life insurance funds linked to the unit of insurance companies, several areas have been identified where there is a possible conflict of interest. For example, when choosing where to invest, insurance companies prefer certain partners or companies in the same group of companies, avoid changing investment directions with poor results, and do not seek to find cheaper investment alternatives for the client. Companies should consider these situations as possible conflicts of interest and changes in investment practices accordingly.
Funds in the same group should only be selected if they are not inferior to funds managed by other managers in terms of performance, applicable fees, quality, and other objective criteria established by the company, and the company must have clear evidence to support such a choice.
Only half of the surveyed insurance companies invest in publicly traded funds (ETFs), whose management fees are generally lower than those of actively managed funds. For the funds reviewed in the analysis, the fees for passive strategy funds were more than half lower than those for active strategy investment funds.
Taxes
The Insurance Law stipulates that an insurer cannot charge an investment management fee if it does not manage the investment directorates themselves. However, it is often not clear from the information provided on company websites whether or not they own the address, so it can be difficult for clients to understand whether a company is entitled to investment management fees.
It is not clear from the information provided to insurance customers that the rates included in the unit value calculation. In addition to investment management fees, insurance companies apply other deductions, such as contract management, which reduce invested assets, which are not even mentioned in the publication of the results of insurance companies.
Results
Almost all life insurance companies post the results of their investment addresses on their websites. However, as the Bank of Lithuania explains, it is difficult for the average consumer without education or work experience related to the economy or finance to understand these results.
For example, some companies only report the absolute return for the entire selected period (5 years) and not the annual return when they publish the results of the investment directorates for a period of more than one year.
The projected results of investment directions shown to clients are in many cases overly optimistic and do not correspond to the investment risk assumed by clients. When choosing interest rates for different scenarios, it is recommended that insurance companies use the longest possible data period (preferably at least 15 years). If the investment direction does not have as much historical data, data from a benchmark or other similar instrument can be used.
The Bank of Lithuania, after evaluating the deficiencies in the life insurance practice linked to the unit revealed during the analysis, made recommendations on how to correct them. In order to enable current and potential clients of life insurers to compare the products of different insurers and the benefits they create for the consumer, and to encourage insurers to create greater added value for the consumer, i. and. In order to reduce deductions for unit-linked life insurance products, better manage investment directions and achieve higher investment returns, the Bank of Lithuania will collect standardized information on the amounts of deductions applied to the products of life insurance linked to the unit and the results of the largest investment directions by asset value.
According to the press release, the information provided by insurers will be summarized and published on the Bank of Lithuania website this year along with an overview that will provide a comparative analysis of deductions and results of life insurance products linked to the Unit.
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