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Life insurance: From 'option' to cornerstone of Slovakia's insurance picture

LIFE insurance used to be an expense people thought they could live without. Decades later, it's becoming a main driver of the country's insurance sector.
The year-on-year increase in life insurance premiums has far exceeded premiums paid for non-life insurance products.

LIFE insurance used to be an expense people thought they could live without. Decades later, it's becoming a main driver of the country's insurance sector.

The year-on-year increase in life insurance premiums has far exceeded premiums paid for non-life insurance products.

Premiums written in life insurance reached Sk13.8 billion (€410.2 million) over the first half of 2007, which is a 10.7 percent increase. Premiums written in other insurance categories reached Sk15.5 billion, with only a 2.8 percent year-on-year increase, according to the Slovak Association of Insurers.

The trend was similar in 2006, when the year-on-year increase in premiums written in life insurance was 15 percent, the association said.

Slovakia's growing living standard, falling unemployment and climbing average wage have contributed to the higher interest in life insurance, said Zoja Rizmanová, senior process manager of the ČSOB Poisťovňa insurer.

"Pension reform has also had a favourable effect on life insurance," Rizmanová told The Slovak Spectator. "The pension reform has clearly showed that in the future, it will no longer be possible to rely entirely on the pension paid by the state social insurer Sociálna Poisťovňa."

Life insurance has also been a way to reduce taxes, through the option of deducting paid life insurance premiums of up to Sk12,000 from the tax base, Rizmanová said. Clients have had this option since 2006.

The increasing interest in mortgages has been another boost for the life insurance business, said Ivana Čambalíková, spokeswoman for the Česká Poisťovňa-Slovensko insurer.

Life insurance can be used as an additional guarantee for a mortgage.

In addition, the growing prominence of heart attacks, obesity, and other medical conditions and the subsequent need for protection has greatly contributed to Slovaks' increasing appetite for life insurance, Čambalíková told The Slovak Spectator.

Citizens are becoming aware that if they want to preserve their living standard at times of unexpected expenditures and reduced income, they have to put away part of their current spending now, the Uniqa insurer said.

Investment life insurance takes off

Investment life insurance is the most popular kind of life insurance, because it gives clients the option of saving, said Čambalíková.

Investment life insurance combines the advantages of life insurance and collective investments in mutual funds. Insurers buy units in mutual funds through asset management companies for their clients' premiums. Each client decides how much he or she wants to invest in which mutual funds.

With capital life insurance, the policy holder pays premiums to an insurer and the insurer guarantees it will pay a certain amount of money to the policy holder after he or she reaches a certain age or dies.

Insurers are not allowed to invest premiums into long-term investment tools, such as equities, which might bring higher yields but are also considered riskier. That is why it gives capital life insurance policy holders relatively low but safe yields.

Interest used to be strongest in capital life insurance.

That was linked to the high level of interest rates and technical interest rates, which is the highest guaranteed yield that an insurance company can offer to policy holders.

But after a decrease in interest rates and changes to the technical interest rate - it was cut from 4.5 percent to 2.5 percent as of January 1, 2007 - and the growing popularity of investments, investment life insurance has taken off, Rizmanová said.

"There are more and more clients who look for higher yields and are willing to accept a higher risk in the end," she added.

However, the client must correctly tune the insurance product so it brings the desired results, insurance experts said. Insurers offer coverage for a wide variety of additional risks that can be added to the main life insurance policy, so it is important for clients to carefully design the contents of their policy.

"First of all, a client must determine what his plan is with life insurance," Čambalíková said.

Clients with high insurance coverage cannot expect the same pay-out as they would get if they just insured the basic risks, she said.

Insurance policies are signed for a very long term, so clients must carefully consider their needs, Rizmanová said.

"The advantage is a policy that is flexible and allows for adding additional risks coverage, or eventually changing the policy amount and the premium, over the length of the term," she said.

Most monthly premiums in Slovakia are in the Sk500 to Sk1,000 range, insurers say. The premium depends on the range of risks that are covered, the policy amounts related to these risks, clients' age when they sign the policy, the number of their dependents, and the amount they would like to get after reaching a certain age.

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