Life insurance is an inseparable part of insurance all over the world. But in Armenia, life insurance does not exist due to a number of reasons, although its introduction could become an important factor in increasing economic stability and solving many other issues.
The essence of insurance and its types
Insurance is considered to be one of the oldest and most popular financial services which regulates economic relations and is an essential part of the financial sphere. It resembles banking and capital markets which, as financial mediators, serve the needs of the business sphere and households.
The essence of the insurance is that it helps to minimize the risk of the possible losses to consumers and households. It divides the risk by passing it from one person, the policyholder (insured), on to the other, the insurer. Insurance does not reduce the likelihood of an accident but it mitigates the burden of the financial expenses incurred as a result.
There are three types of insurance;
- Life insurance
- Non-life insurance (any insurance other than life insurance)
One of the differences between life and non-life insurance is the term of the contract: non-life insurance contracts are usually short-term, while life insurance contracts have a longer duration.
In case of life insurance the policyholder, by paying insurance premiums, is guaranteed to receive a sum of money when he/she reaches a certain age or in case of death, it will be given to the beneficiaries designated by him/her. That is to say, it is a means for managing the income-related risk of individuals and families. In this respect, the insured risk is the duration of a person’s life.
he following types of life insurance are common in developed countries:
Term life insurance – in this case the policyholder signs a short-term contract with the insurance company, and the beneficiaries receive insurance compensation if death occurs within the specified period.For instance, a 30-year-old acquires a $500,000 worth term life insurance for 10 years with a monthly premium of $50. If the person dies within the period of these 10 years(eventualities considered, of course), the insurance company will pay $500,000 to the beneficiaries designated by him/her. And if the event does not occur during that period, the contract will expire and he/she will not receive the benefit. However, after the expiration of the term, the insurer can either reinstate it with some new term,changing the term life insurance with whole life insurance and without losing the paid amounts of money, or allow the contract to be terminated.
This means that such contracts, in contrast to whole life insurance, do not have an investment element, and their only benefit is the money guaranteed by the contract which is paid if the event should happen within the term of the contract. The advantage of this type is that it often promises greater amounts of financial compensation than the other types of life insurance and is relatively cheap.
Permanent insurance – this type is valid until the end of life, and along with the insurance, it also comprises an investment element. This is usually more expensive than term life insurance. The most common types of permanent insurance are whole life insurance and universal life insurance.
Whole life insurance – this is insurance for the whole life. For example, if a person is 30 years old and must retire at 63, either the beneficiaries receive compensation in case of the person’s death before 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 payment.
Life insurance is regarded not only in terms of receiving compensation in case of death, but it also serves as a tool for accumulation. Most of the life insurance policy owners use this class of insurance which is considered to be an effective means of making long-term investments, as compared to bank deposits.
Universal life insurance – this is an insurance type with an investment element. As opposed to whole life insurance,universal life insurance is more flexible, particularly in terms of insurance premiums, the amount of compensation in case of death, and the investment element. In the case of universal life insurance, the policyholder regularly pays the insurance premiums, and the company, gathering these funds, makes investments as this type of insurance has an investment element; thus, part of the investment proceeds defined by the contract is transferred to the policyholder’s investment account.
Life insurance market in the world and its influence on the economies of countries
The increase in the number of insurers and the development of the insurance sphere are directly related to the development of the economy in the country. The presence of a viable market of life insurance has a significant influence on the economy and allows for sustainable economic and financial growth .
In this respect, life insurance has a more important role than non-life insurance since the funds it provides are long-term and, therefore, more important for the development of capital markets. This sphere has a considerable impact on the economy in general; it mobilizes the domestic savings, channelling the accumulated funds into productive investments and promoting infrastructure development and construction (such as roads, ports, power stations, etc.). The need for long-term investments is central to addressing such global issues as climate change, scarcity of resources, urban development, etc..
In developed countries insurance companies use the accumulated funds to protect policyholders against various risks, and are a source of savings and investment.
Insurance companies make investments in the capital market. Approximately 5 percent of the financial assets of life insurance companies are invested in the stock exchange (in the form of stocks). Companies invest only a fraction of the insurance premiums in the risky stock exchange and get the opportunity to have high profits, without taking the full risk of the stock exchange instability.
Bonds, stocks and mortgages comprise about 90 percent of the investments of life insurance companies . The attraction of bond investments is that the expected cash flows from them are more predictable. In most countries, insurers invest more than half of their assets in bonds. In 28 out of 39 countries, bonds accounted for more than 50% of life insurance investments . In terms of the number of life insurance premiums, the USA, China, Japan, Great Britain and France are considered to be world leaders .
In the USA, insurance companies make up a great part of the capital market and play a vital role as institutional investors. Statistics show that as of 2018, there were nearly 773 registered life insurance companies in the USA, and 60% of the population had life insurance .
In the USA, insurance investments have a positive influence/impact on almost all sectors of the economy, helping farmers, households, businesses of the country to grow and become more innovative.
In Japan, another country with well-developed life insurance, the life insurance market is about $335 million in terms of insurance premiums, which makes it the third biggest market in the world after the USA (594 million dollars) and China (314 million dollars), and the largest one in Asia .
The insurance market is thought to be the cornerstone of the Japanese economy and continues to develop at a global level. As of 2018, there were 41 licensed life insurance companies in Japan . With over 300,000 billion Japanese yen ($2794 billion) in assets,  domestic life insurers play a significant role here as investors in the Japanese and global markets.
Thus, the insurance system in developed countries, being one of the most essential strategic sectors 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 promote economic growth.
Obstacles and ways of the development of life insurance in the RA
In Armenia insurance made progress after 2010 when compulsory usage-based auto insurance was adopted. Over the years, this also resulted in a change in the number of the active insurance contracts and premiums of the insurance companies in the RA.
, The index characterizing the activity of the insurance companies in the RA in 2018, insurance premiums\GDP ratio, was 0.69%, and the rate of insurance premiums per capita amounted to 13,929 drams . As for life insurance, there are no companies providing such services in Armenia. According to the RA law “On insurance and insurance activity”, adopted on April 9, 2007, the same company has no right to provide life and non-life insurance at the same time .
Such a legal restriction has to do with short-term investment policies of non-life insurance companies and long-term investment activities of life insurance companies implying long-term risk assessment . That is to say, there is the problem of separating these two types and managing the risk, which became one of the major reasons for such a regulation.
In the case of life insurance, insurance compensations can be paid many years later. Therefore, the experience and history of the company are essential here, and in Armenia, this sphere, one might say, has just begun to develop, and due to this fact, the existing insurance companies do not provide life insurance.
There are crucial elements defining the demand for life insurance. It is affected by the character of the consumers and the external environment (economic, socio-cultural and institutional factors). Another major factor contributing to the purchase of life insurance is the level of consumer income.
Political and legal stability is also important for a viable and progressing life insurance market. Since life insurance implies a long-term relationship between the consumer and the company, the more stable the current legal and political systems in the country are, the greater the willingness of the parties to establish a relationship is.
One of the reasons why life insurance does not exist in Armenia is the lack of demand, and the reason for that is the low standard of living of the population and the fact that people have not yet developed an insurance culture, most of them do not realize its necessity. Adequate staffing is another of the existing problems that needs to be resolved, as the effectiveness of insurance companies largely depends on risk management, while here the strategy of managing them is also weak because of the shortage of qualified specialists (actuaries).
Thus, for the establishment and development of the life insurance sphere/sector (as well as any other sphere), it is first necessary to identify all the existing issues, make necessary corrections 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 required and established in Armenia where its introduction, in fact, will become an important factor in improving the welfare of the population, in increasing economic stability and solving many other issues.
Author: Mariam Khachatryan © All rights reserved.
Translators: Mariam Antikian and Lilit Arsenyan.