Insurance investments: why they are the most important part of managed savings and why Italians like them so much

Even in the investment choices Italians seem attracted to the old football adage of "first don't take it": it's better to earn less from your investments than expose your savings to the risk of sudden and significant losses. In the end it is “loss aversion” which the postulates of behavioral finance also talk about. This explains if, in the great cake of managed savings – an amount of 1.537 billion in 2022 according to estimates by the Bank of Italy – the insurance investments represent the most important component. With 751 billion life reserves, i.e. the sums managed by the companies waiting to be released to their customers, exceeded the shares of mutual funds in 2022, which remained at 664 billion.

On the shelves of insurers, as we will see, there is a bit of everything but the main component, that of Class I revaluable policies, is precisely represented by policies sold to savers such as “guaranteed” products. Under that halo of protection lie reserves which, by the end of 2022 had reached the respectable figure of €574 billion. The unattachability of the policies and their exclusion from the inheritance are other aspects which, in their eyes, make them even more attractive.

The insurance branches

The great cauldron of life market – fueled a premium flow of €2022 billion in 93 – is broken down into six insurance lines, some of which are thriving and others withered or even completely lifeless like the melancholic Branch II (life insurance nuptiality and birth), regulatory residue from the prehistory of the insurance market. Class IV on insurance is completely asphyxiated long-term illness (a collection of only €221 million in 2022) and slightly more leafy is Ramo V on capitalization operations (premiums of €1,3 billion in 2022). Then there is Branch VI where the management of the pension funds (€3,2 billion in 2022). But, in conclusion, the bulk of savers' choices are concentrated in Class I of life insurance (€61,4 billion in collections) and in Class III of policies unit and index linked (€28,3 billion) connected with investment funds or indices. In the latter case, they are essentially investment funds or structured bonds with an insurance cover, which allows the investor to take advantage of the aforementioned characteristics of the insurance contract (non-attachability, exclusion from the inheritance). 

The “engine” of the insurance guarantee

The policies that cover the actuarial risk (the so-called temporary death policies), with which a capital is released to the beneficiaries if the subscriber dies within a certain period of time. To these are added the specifically savings policies, the "guaranteed" ones. THE insurance premiums they are invested in investment funds, called separate management, and the performances obtained by the manager are passed back to the investors, minus a percentage that the company retains for the service. Normally the results obtained year after year are consolidated, that is, acquired forever by the insured. The contracts of class I revaluable policies have always incorporated a guarantee on the invested capital and/or on the annual performance. At the end of the last century the guaranteed minimum rate it was around 4 percent. Then over the years the percentage progressively decreased, until it disappeared in the period of ultra-low rates, following the progressive reduction in interest rates on government bonds which insurance managers have always hoarded extensively. And which have always been the cornerstone of their investment styles. 

But what is it based on? the promise of results given to investors? The assets invested in the management are always calculated at historical cost until the manager decides to sell them, resulting in capital gains and losses. This technique allows those managements to mitigate the volatility spikes of the financial markets and to exhibit substantially constant results over time (between 3,1 and 2,5 percent in the period 2017-2021). In years when the markets are doing well, the manager tends to make few disinvestments to avoid entirely "burning" all the capital gains present in his portfolio. When the financial barometer turns for the worse it will behave in the opposite way to ensure its subscribers a positive result.

Year 2022, escape from separate management

This proven financial mechanism continued without major shocks for many decades until, in 2022, the surge in interest rates it brought out a vulnerability that had never been found in those managements. The rate increase resulted huge capital losses potential in insurance portfolios, which in themselves did not cause great damage considering the accounting mechanism (at historical cost) of the assets. The fact is that a growing share of savers has decided to redeem policies to purchase government bonds newly issued securities which have in the meantime become more attractive. In doing so they forced insurers to sell assets at a loss to return the guaranteed capital to policyholders who redeemed their positions. For investors separate management they were the only asset class with an average positive performance (+2,56%) in a year characterized by the decline of the stock and bond markets. But insurers have suffered the cost of the guarantee associated with those policies and a medium-sized company, Eurolife, went into default, forcing IVASS (Institute for Insurance Supervision, the insurance sector authority) to temporarily block redemptions. Suddenly investors realized that even i “guaranteed” products could reserve unpleasant surprises. In the end, the major insurance groups in the country took responsibility for the Eurovita crisis, together with the banking groups that those policies had placed. But the need to have a safety net for the future has pushed the government to introduce, with the 2024 Budget Law, a guarantee fund for life insurance policies, financed pro rata by the companies.

Social security and "decorrelated" insurance products

If Classes I and III are the "building blocks" of insurance investments, these basic elements can be mixed differently to obtain the risk-return combinations more suitable for individual savers. Thus the so-called were born multi-line policies in which there is a component of Branch I to ensure a guaranteed base for the investment and a component of Branch III, more exposed to the financial markets, aimed at increasing the overall performance of the product. In 2022, multi-sector products represented 48% of the total collection of the life branch.

The same types of policies are also found in the supplementary pension market, where insurers are present with i Pip, individual pension plans, to which 2022 million taxpayers were registered at the end of 3,8. A higher number than that (3,7 million) of members of the contractual pension funds established contractually by companies and unions. It should also be added that companies are also present in this last segment, where they normally occupy with their products the space reserved for so-called guaranteed investment lines. Unlike other investments, social security investments enjoy full tax deductibility (up to an annual ceiling of €5164) and a preferential withholding tax (20%) on investment results. On the opposite front, positions cannot be redeemed before retiring except in cases of necessity (loss of job, serious operation, purchase of first home). The following have also recently appeared on the shelves of pension products Pepp, the pan-European individual pension products, established at continental level to allow full transferability of positions to those who change their country of residence during their working life. Given the growing mobility of labor within the continent, over the years these products will acquire growing shares in the social security product market.

To complete the picture of insurance investments, it is finally necessary to mention the Ils (Insurance linked securities) with which insurance risks are securitized, i.e. transformed into bonds. The most famous are the cat bond, natural disaster bonds. Their main characteristic is that they are decorrelated to the performance of the financial markets. Investors obtain significantly higher performances than the current performance of the bond markets, but if the event with which they are associated (a hurricane, a particularly intense earthquake) actually occurs, coupons and even the capital can dissolve. They are therefore products suitable only for sophisticated investors.

La wealth of Italian families it is largely made up of houses, shares in unlisted companies as well as cash and current account deposits. For the other components, a greater weight lies with managed savings: insurance and mutual funds in fact affect the portfolios of Italian families to a greater extent than the direct holding of bonds and shares of listed companies.