No pension cuts as a result of losses in securities investments, but a guaranteed secure retirement provision in times of crisis: classic life insurance is back in high demand. Triggered by the Corona crisis, it is experiencing a new upswing as a form of retirement provision.
As can be read in the current finance news on http://www.procontra-online.de, the number of life insurance policies in Germany rose by 34% (!) at the high point of the COVID-19 crisis. This is the result of a survey conducted by Swiss Life Germany among 1.3 million customers.
Awareness of safety is increasing
The corona virus not only triggered the worst economic crisis since World War II, but also a boom for life insurances. Suddenly the need of the long-term security in the age precaution is again in the focus and less the highest possible investment success. A failure impairs the preventive effect. Particularly “sustainable” when securities funds, which should serve as “retirement provisions”, crash immediately before retirement, such as the state-owned Japanese pension fund – incidentally the largest in the world (according to Kurier online from 04.07.2020). This fund posted a loss of EUR 146 billion in the first quarter of 2020, that is 11% of its total value – a disaster and also the worst decline since the 2008 financial crisis.
A fund can cope with such a crash for a maximum of a year before pension payments have to be reduced. There is therefore a risk that pensions will be cut immediately upon retirement or soon afterwards. This is not possible with classic life insurance policies.
The performance of classic life insurance versus the long-term development of securities: The uncertainty factor is volatility, not the long-term return!
The well-known MSCI World Index of Morgan Stanley Capital International, tracks the historical development of 1,600 shares from 23 industrialized countries. Its long-term performance is somewhat higher than that of a classic life insurance policy (+/- 40%), but the volatility is also very pronounced. There can therefore be large upward and downward fluctuations. This is in contrast to the classic pension insurance, where there is no loss of capital shortly before as well as after the retirement and thus no pension cuts.
Only the classic pension insurance can prevent capital market risks and pension cuts – both private and commercial via the pension commitment reinsurance.
The investment of a classic pension insurance (= a form of classic life insurance with guaranteed, lifelong pensions, called “pension commitment reinsurance” at company level) is made in a classic cover pool. This is a very conservative and safety-oriented investment and is based on strict legal regulations, which are just as strictly controlled and monitored.
In life insurance, the strategic focus is on security and not on the exploitation of return opportunities. This can prevent the effects of capital market risks. This should be taken into account when combining different financial products – from old-age provision to asset accumulation – and also differentiated accordingly.
Ante Banovac shares his thoughts about future risks facing the insurance industry and the state of the insurance market in Serbia, Slovenia and Croatia
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