Life insurance is considered an integral part of insurance worldwide. However, life insurance does not work in Armenia for a number of reasons, although its introduction may become a relevant factor in increasing the economic stability and solving many other issues.
The essence of insurance and its types
Insurance is one of the oldest and the most famous financial services that regulate the economic relations and is an important part of the financial sphere. It is similar to the banking and capital markets, which, as financial intermediaries, serve the needs of the business sphere and households.
The essence of insurance is that it helps to minimize the risk of possible losses of consumers and households. It separates the risk from one person, the insured, passing it on to another person, the insurer. Insurance does not reduce the possibility of an accident, but it lightens the financial burden that arises as a result.
There are three types of insurance:
- life insurance
- non-life insurance (any insurance except for life insurance)
One of the differences between life and non-life insurance is the terms of the contract: non-life insurance contracts are usually short-term, while life insurance contracts have longer terms.
In case of life insurance, the insured, by paying insurance premiums, is guaranteed that he/she will receive money when he/she reaches a certain age or in case of death, it will be transferred to the beneficiaries, mentioned by him/her. That is to say, it is a way to manage the risk related to the income of individuals and families. In this case, the insured risk is the life of the person.
The following types of life insurance are common in developed countries:
Term life insurance. In this case, the insured enters into a short-term contract with the insurance company, and the beneficiaries receive insurance compensation if death occurs within the mentioned period.
For example, a 30-year-old person gets a 10-year term life insurance worth of $500.000, with a monthly premium of $50. If the person dies within these 10 years (coincidentally, of course), the insurance company will pay the beneficiaries, specified by the insured, $500.000. And if it does not happen within this period of time, the contract will expire and he/she will get no benefits, but after the expiration of the term, the insurer can either restore it for a new period by changing the term contract with whole life insurance, without losing the amounts paid, or let the contract be terminated.
This means that this kind of contracts, unlike whole life insurance, have no investment component and the only benefit is the amount guaranteed by the contract, that will be paid if the accident happens during the term of the contract. The advantage of this type is that it often promises compensation of a much higher amount of money than other types of life insurance, and is relatively cheap.
Permanent life insurance. This type is valid until the end of life, but besides the insurance, it also contains an investment component. It is usually more expensive than term insurance. The most common types of permanent life insurance are whole life insurance and universal life insurance.
Whole life insurance. This is an insurance for the whole life. For example, if the person is 30 years old, and he/she must retire at the age of 63, either the beneficiaries receive compensation in case of the person’s death before reaching that age, or the accumulated amount is paid to him/her after the age of 63, both in the form of monthly pension payments and a lump-sum.
Life insurance is not only considered in terms of receiving compensation in case of death, but it also serves as a tool for accumulation. The majority of people, who have life insurance, use this type of insurance, which is an effective way of making long-term investments compared to bank deposits.
Universal life insurance. This is a type of life insurance with an investment component. Unlike whole life insurance, universal life insurance is more flexible, particularly in terms of premiums, the amount of compensation in case of death, and the investment component. In case of universal life insurance, the insured regularly pays insurance premiums, and the company, collecting these funds, makes investments, since this type has an investment component, therefore, the contractual part of the income is transferred to the investment account of the insured.
The global life insurance market and its impact on the economy of countries
The Growth in the number of insurers and the development of the insurance sphere are directly related to the development of the country’s economy. The existence of a viable life insurance market has a significant impact on the economy, ensuring stable economic and financial development.
In this case, life insurance plays a more important role than non-life insurance, as it provides long term funds and therefore, they are more relevant for the development of capital markets. This sphere has a significant impact on the overall economy: it mobilizes internal savings by directing the accumulated funds to effective investments, and promoting the development and construction of infrastructures (such as roads, ports, power plants, etc.). The need for long-term investments is primary, to solve global issues such as climate change, scarcity of resources, urban development, and so on.
In developed countries, insurance companies protect the insured from various risks, using accumulated reserves and act as a source for savings and investments.
Insurance companies invest in the capital market. About 5% of the financial assets of life insurance companies are investments in the stock exchange (in the form of shares). Companies invest only some part of the premiums in the risky stock market, earning high incomes, without taking on the full risk of stock market instability.
Bonds, shares and mortgage tools make up about 90 percent of life insurance companies’ investments . The attractiveness of investing in bonds is that the expected future flow of income is more predictable. In most countries, insurers invest more than half of their assets in bonds. The bonds have comprised more than 50% of life insurance investments in 28 countries out of 39 . The leaders in the world in terms of life insurance premiums are the United States, China, Japan, the United Kingdom and France .
Insurance companies, that play a vital role as institutional investors, make up a large and relevant part of the capital market in the USA. Statistics show that in 2018 there were about 773 registered insurance companies in the United States and 60% of the population has life insurance .
Insurance investments have a positive impact on almost every sphere of the economy in the USA and support the farmers, households and businesses of the country, making them grow and become more innovative.
In Japan, another county with a developed life insurance market, the life insurance market is about $335 million in terms of life insurance premiums, making it the third largest market in the world after the United States ($594 million) and China ($314 million) and the largest in Asia .
The insurance market is considered to be the cornerstone of the Japanese economy and continues to grow globally. In 2018, there were 41 licensed life insurance companies in Japan . Domestic insurers play a relevant role in Japanese and global markets with more than 300.000 billion Japanese yen ($2794 billion) asserts .
Thus, the insurance system in developed countries, being one of the most crucial strategic spheres of the economy, gives an opportunity to increase the level of social security of the society, the level of health care of the population and to support economic growth.
The ways and problems of developing life insurance in Armenia
Insurance in Armenia began to develop quickly after 2010, when the compulsory insurance based on the use of vehicles was adopted. During the years it also led to the change in the number of current insurance contracts of the insurance companies in the Republic of Armenia and in insurance premiums. The indicator characterizing the active state of the insurance companies in Armenia in 2018, the insurance premiums/GDP ratio, was 0.69%, and the insurance premiums per capita was 13,929 drams . As for life insurance, there are no companies providing such services in Armenia. According to the law of the Republic of Armenia “On Insurance and Insurance Activities” adopted on April 9, 2007, the same company does not have the right to provide both non-life and life insurance at the same time .
Such a restriction of law is connected with the fact that non-life insurance companies carry out short-term investment activities, and life insurance companies manage long-term investment policy, which presupposes long-term risk assessment as well. In other words, the problem of the separation of these two types and the management of the risk arose here, which became one of the main reasons for such regulation.
In case of life insurance, the insurance compensations can be made after many years. Therefore, the experience and history of the company are of great importance here, and we can say, that in Armenia this sphere is just developing, and also due to this, the existing insurance companies do not provide life insurance.
There are determinants of life insurance demand. The character of consumers and the external environment (economic, socio-cultural and institutional factors) have their impact on it. Another important factor contributing to the purchase of insurance is the level of consumer income.
The stability of the political and legal sphere is also relevant for a viable and growing life insurance market. As life insurance presupposes a long-term relationship between the consumer and the company, the more stable the legal system in the country seems to be, the higher the willingness of the parties to enter into a relationship is. One of the reasons for the lack of life insurance in Armenia is the absence of demand, and the reason for its absence is the low standard of the population’s living, and at the same time the fact that an insurance culture has not developed yet, and most of people do not realize its necessity. An appropriate staff is one of the existing problems that needs to be improved, as the efficiency of insurance companies highly depends on risk management, and here the strategy for managing them is also weak because of the lack of qualified specialists (actuaries).
Thus, for the formation and development of the life insurance sphere (as in case of any other sphere), first of all, it is necessary to identify all the existing problems, work them out and apply certain possible methods that will contribute to their solution.
Therefore, taking them into account, we can say, that it will take a long time for this type of insurance to be demanded and to work in Armenia, where, we can prove, that its introduction will become an important factor in increasing the welfare of the population, raising economic stability and solving many problems.
Author: Mariam Khachatryan © All rights reserved.
Translator: Lilit Arsenyan.