Investments for Expats
The credit and economic crisis has, understandably, caused some people to question the banking system and to seek out an alternative investment with more security. We, as independent financial advisers to expats living in Spain, have been aware of an alternative and have fortunately made extensive use of this when appropriate. Here is an explanation of the banking model and the life assurance company model. The differences in these legal structures can give you additional protection.
The Banking Model
Banks accept deposits from customers and pay a rate of interest. They also source external funding from other banks and institutions and pay them a rate of interest. These funds are then lent to the bank’s customers as borrowers to whom they charge a higher rate of interest.
The two key risks for banks are:
• Lending risk (loans not repaid / defaults)
• Funding risk (proportion between customer deposits and external funding)
Risks can arise because the assets and liabilities are not aligned.
The Life Insurance Company Model
Life companies accept premiums from policyholders and, for life cover / protection business all premiums are pooled to pay protection claims. Life cover risks are mitigated through reinsurance.
For unit linked insurance business, premiums are invested on behalf of policyholders in a range of internal insurance funds. Claims and surrenders are paid for by selling assets linked to the policy’s units. Liabilities are matched by assets for these purposes as life companies must hold total assets in excess of prudent liabilities. The solvency margin is an extra layer of assets in excess of the liabilities. Insurers match assets to liabilities so if an asset falls in value so does the corresponding liability.
There are therefore fewer risks to this type of model because the assets and liabilities are matched. In addition, Policyholders' assets are invested, ringfenced and protected.
Many of the life assurance companies that offer this type of product offer EU "compliant bonds". This provides tax benefits that are agreed and accepted in a number of EU territories.
Models, Irish Life International