Cologne Inflation keeps the Germans in suspense. Driven by rising energy and food prices, the annual inflation rate reached 7.9 percent in August. After the expiry of the nine-euro ticket and the fuel discount, the cost of living will probably continue to rise sharply in the coming months. Bundesbank President Joachim Nagel expects double-digit inflation figures by the end of the year. At the same time, there is still no or only minimal interest on the savings account.
And at the beginning of 2022, the so-called maximum technical interest rate in life and pension insurance was cut in threes from 0.90 to 0.25 percent. This further reduces the attractiveness of the Germans’ former favorite resorts.
“With savings products such as classic endowment or annuity insurance, positive real interest is not possible because of the high inflation,” says Lars Heermann, Head of Analysis and Evaluation at the Cologne rating agency Assekurata. This is likely to remain the case in the medium to long term. An alternative is to invest in the stock exchanges. There are setbacks here too. 2022, for example, has been a weak stock market year so far.
But over the medium and long term, returns on stocks and aggressive funds far exceed those on bonds and savings accounts. Those who do not dare to go into the financial markets alone have other options – such as unit-linked pension insurance.
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ETF index funds in focus
In contrast to traditional, classic annuity insurance, the savings in unit-linked policies flow into investment funds or ETF index funds. Insurance companies usually offer model solutions for defensive, balanced or offensive strategies. However, the customer can also choose one or more desired funds himself and exchange them almost at will during the term.
The main options are equity and mixed funds as actively managed variants or ETF index funds. Bond and money market funds round off the range. However, they are hardly suitable for long-term savers – especially in times of low interest and inflation.
The future therefore belongs to unit-linked insurance without guarantees. According to the industry association GDV, business has grown by 117 percent since 2017. “The quality of the funds selected is crucial for the long-term success of the policies,” says Assekurata expert Heermann. The rating agency, which specializes in insurance, examined the leading providers of unit-linked pension insurance for the Handelsblatt.
Assekurata examines the quality of all funds offered for the respective policy. The main factor in the evaluation is the return achieved over the past three, five and ten years. It also determines what risk the fund managers took and how they were rewarded for it. It also counts how the funds have performed in particularly weak and strong markets. According to Heermann, the results are pleasing. “Despite the difficult stock market environment, the fund quality has stabilized at a very high level. Many companies look after their products carefully.” 15 of the 31 participating insurers, i.e. almost half, achieved at least 60 points in 2022 and thus the top mark “very good”. The other 16 scored “good”.
The continued trend towards the use of inexpensive ETF index funds is particularly striking. These simply reflect an index such as the Dax, Euro Stoxx, S&P 500 or MSCI World. They typically only charge 0.1 to 0.5 percent in fees per year, making them much cheaper than actively managed funds at 1.5 to 2.0 percent.
Offers from insurers reflect the trend
With clever tactics and a high cash reserve, active managers can certainly bring in their higher management fees in difficult stock market years. However, the longer the comparison period, the more difficult it is for them as a rule. Critical customers know this and act on this knowledge. On average, around 46 percent of the money newly invested in equity funds now migrates to ETFs on equity indices.
The offers of the insurers reflect the trend. Nine of the 1322 funds used are offered by ten or more companies. Eight of these are ETF index funds and the ninth, Dimensional Global Core Equity, is an ETF-like product with a very broad portfolio. Customers are pleased that almost all of the ETF favorites achieve above-average grades. The only two exceptions are Asia-Pacific focused ETFs. In this investment market, which is difficult to understand, the expertise of active fund managers is currently paying off even more.
Huk-Coburg shows that the financial markets can be mapped very efficiently with just a few ETFs. The insurer rose by six points to 72 points compared to the previous year, jumping from sixth to first place. “Our motto for customers and sales is: Keep it simple,” says Michael Martin, who is responsible for unit-linked pension insurance in product marketing at Huk-Coburg.
In addition, transparency is important. “Accordingly, we have limited ourselves to seven carefully selected funds, with which we cover the most important financial markets.” Six of these are inexpensive ETFs from iShares, the seventh is the in-house “Huk Welt Fund”. The opportunity-oriented mixed fund invests at least 80 percent in the global stock markets, the rest in more defensive investments. Two-thirds of customers trust this managed variant completely.
Europe lagging behind
The insurer took second place in the area of churches. This is not surprising, since Huk-Coburg controls the portfolio for the provider. The portfolio contains exactly the six ETFs that brought Huk-Coburg to the top. Only the managed fund differs. At the church insurer, this is an ethics fund that focuses on Europe. “In recent years, the European market has lagged behind the USA in particular,” explains Martin, explaining the small gap compared to the Huk sister portfolio. Overall, the church insurer gained three points to 69 compared to the previous year.
Cosmos has slimmed down. By 2018, the direct insurer still had around 4,000 funds on offer. “That was far too much and sometimes overwhelmed our customers,” admits product manager Michael Wenzel. First, Cosmos reduced the number of funds. There are currently only 39 products that are checked regularly and replaced if they perform poorly. In 2021, society then started the green revolution.
Since then, there have only been sustainable funds in accordance with Articles 8 and 9 of the European Disclosure Regulation. “As a direct insurer, we wanted to set an example and be the first one hundred percent sustainable provider,” says Wenzel. It was worth it for the customers. In the analysis, funds with sustainability criteria scored 59 points (Article 8 funds) and 64 points (Article 9 funds) on average by 1.5 to 6.5 points better than conventional offerings. Cosmos made a good selection from the already above-average sustainability funds and achieved 68 points.
Basler in fourth place can also be satisfied. After two second places in 2020 and 2021, the Hamburg subsidiary of the Swiss insurance group only fell minimally to 65 points. The major cleaning in the portfolio from 2019 is still having a positive effect. “We benefit from the investment expertise of our parent company, Baloise,” says product manager Marlies Tiedemann. Most recently, Basler invested in service quality. “With the new fund checker, we offer customers ongoing information on all funds that can be saved in the policies.”
Like Basler, almost all insurers offer process management. At the end of the term of the contract, the assets saved are gradually shifted into defensive funds. This is to prevent customers from falling into a weak stock market phase in the last few meters of a long-term savings program. It was worth it in 2022. Although there was no crash like in the Corona spring of 2020, most indices lost 15 to 20 percent in the first half of the year. “Those who used process management in good time could minimize losses,” says Michael Martin from Huk-Coburg.
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