The only way for offshore life companies to remain ahead of the curve in difficult times is to focus on the specific needs of the client, and to re-emphasise the unique advantages of the offshore bond structure
At this time when there so many changes impacting on the offshore life industry, there is one well-tested way of remaining confident that propositions will hit the mark - and that is to keep focused on the needs of the investor.
This may sound like a truism but the tendency in the offshore life assurance industry has been to target a small number of products at a broad range of investors in different countries with widely-varying aims and attitudes. Now there is an increasing realisation that the old way of doing business, particularly in high volume markets, will have to change if the industry is to survive. It is worth looking at a number of markets where offshore products are sold to see the different forces at work.
The market in the UK for offshore pooled bonds is a case in point: products have typically been bought by a range of individuals with the usual mixture of aims, ranging from capital growth to capital preservation to maximisation of income. Historically, most investments were into with-profits funds - then, after the further market dip in the middle of 2002, the emphasis switched to guaranteed funds.
Although the bear market of 2000/03 ran longer and deeper than other bear markets in recent times (the wounds therefore taking longer to heal), there are now clear signs that investors are sticking their heads above the parapet and returning to straightforward equity funds after nine months of recovering and generally more stable markets.
Offshore pooled bonds have traditionally been centred around with-profits and guaranteed funds (combined with the benefit of gross roll-up), which are difficult to provide in other product types. In contrast, equity funds can be bought as mutual funds or fund supermarkets. This means that it will be harder to find the niches where offshore bonds can meet investor needs in future as the attractions of with-profits and guaranteed funds diminish, and the greater cost of these bonds is thrown into stark contrast.
The corporate investment market is one niche where offshore products have been gaining credibility over recent years and is a good example of how a focused strategy - in this case utilising a bespoke capital redemption version of the product - can be successful.
Offshore portfolio bonds are still proving highly attractive in the UK, based on their powerful combination of open architecture for investment allied to their suitability for use as trust solutions to a wide range of taxation problems. For investors wanting to explore the full range of investment options, with alternative strategies being used for a sizeable percentage of business being written, the benefits of this flexibility far outweigh the cheaper options of onshore products which have much more limited investment choice.
It is important that offshore portfolio bonds address their Achilles heel to ensure that the fragile balance between price and quality is kept in equilibrium. It is not difficult to see that the future survival and prosperity of this sector will to a large extent depend on the prudent use of e-commerce, both in the battle to reduce costs and to provide investors with the Rolls-Royce service they are entitled to expect, given the price they pay and the average asset size that these bonds attract.
Reducing costs will also be a way to encourage more UK investors to look at the unique benefits of these bonds - particularly if they can be made more accessible to a greater number of advisers at the same time by increasing the level of support given on portfolio construction aspects.
The Sandler report criticised the level of investment knowledge of many advisers, without fully recognising the skills needed to advise on the huge range of products and financial planning tools available to individual and corporate investors. So increased support for advisers in the critical area of selecting the right asset allocation, and the right funds within each sector, will certainly help to stimulate growth in the portfolio bond market - and not only will it help advisers further enhance their level of professionalism but it will also help to reduce their own costs.
Looking further afield than the UK, many potential developments in the e-commerce arena will also benefit portfolio bond sales in areas such as the Channel Islands and Isle of Man. However, the main driver for growth in these territories in this sector at present is undoubtedly the role that these bonds can play in tax mitigation. Governments in many developed countries are undertaking initiatives to create a more even playing field between onshore and offshore investment, and portfolio bonds can play a key role in tax mitigation for affected investors.
The tax-effectiveness of portfolio bonds in these offshore islands is attracting the attention of professional advisers who would not previously have considered life insurance products as having a part to play in financial planning for the seriously wealthy. These tax advantages are manifold and it is worth restating what they are:
&149; Funds accumulate within the bond wrapper without any direct liability to tax
&149; Underlying investments within the wrapper can be switched without triggering a tax liability, so active investment management can be undertaken without being constrained by tax considerations
&149; With direct investment in equities or fixed interest, or collectives or deposit accounts, a tax liability arises at the point that dividends, distributions or interest payments are made. However the point at which tax is incurred in respect of investment growth within the bond wrapper can be controlled for maximum tax efficiency (adding extra lives to a bond can afford the policyholder even more flexibility, often deferring tax liability almost indefinitely).
There are also significant advantages in aspects other than taxation - investment benefits include the fact that assets can normally be transferred unchanged into the protection of the bond wrapper. It is also usually possible to effect a transfer of assets into a bond without disturbing existing investment advice arrangements, such as discretionary management agreements.
There are also administrative benefits. Until a portfolio bond is encashed or benefits withdrawn there is nothing to report on an annual tax return, so accounting costs can be reduced. And because these bonds provide regular valuations of all assets held, usually quarterly, the servicing needs of policyholders, whether individuals or trustees, are closely supported.
The Hong Kong experience
In Hong Kong, while the pooled and portfolio bond markets are of a worthwhile size, they compete in an investment sector dominated by mutual funds, which are benefiting most from the market upturn. It is the regular premium sector that offers most scope for growth.
The advent of the Mandatory Provident Fund, although highly contentious when it was introduced and with the jury still out on whether it will be successful, has had the indirect effect of raising awareness of demographic changes.
These changes, such as the weakening of the extended family and improving mortality, are highlighting the need for retirement provision. In Hong Kong, though, it is a different issue to the one that Western governments are struggling with, which is that 'the state cannot afford to pay any more" because state retirement benefits are negligible.
So the regular premium market has a key role to play in retirement provision and growth in this sector is also being fuelled by the increasing trend for wealthier Hong Kong Chinese investors to fund their children"s higher education abroad. A good number moved abroad around 1997 but have since returned and, as economic power transfers to these people, they can afford to have children educated at universities in English-speaking countries - and are also keener to do so having maybe seen facilities at first hand.
If you look at all these areas, as well as regions such as the Middle East where offshore products are distributed by providers with UK headquarters, the same message is spelt out - going local with products and funds, as well as sales and customer service support, will pay dividends in the long term.
Offshore pooled bond products in the UK have typically been bought with the 'usual" mixture of aims, such as capital growth and maximisation of income.
The main driver of offshore products in domiciles such as the Channel Islands and the Isle of Man has been tax mitigation.
The regular premium market in Hong Kong has a role to play in retirement provision.
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