Tax and interest rate are two factors behind the surge of life insurance

RECORD GROWTH OF ENDOWMENT LIFE INSURANCE IS ASSOCIATED WITH PREFERENTIAL TAXATION AND LONG-TERM SAVINGS

• Endowment life insurance achieved record growth in 2024. According to the Bank of Russia, premiums for investment and savings life insurance grew by 194% over nine months of 2024, or almost threefold compared to the same period in 2023. At the same time, premiums in other segments of the insurance market only increased by 3.5%.

• The dynamics of premium growth were uneven. The most significant growth was recorded in premiums for insurance contracts with terms of up to one year and from three to five years. The increase in premiums for contracts with other terms had virtually no effect on overall performance.

• Higher premiums for short-term contracts are due to their advantages compared to deposits in terms of taxation. Changes to the taxation of deposits and growth in interest rates noticeably boosted the appeal of short-term investment and savings life insurance. The elimination of tax arbitrage from the beginning of 2025 will lead to a sharp decline in sales of short-term insurance policies.

• Endowment life insurance makes it possible to lock in a high interest rate for several years. The lack of alternatives available to a wide range of clients has led to a significant increase in demand for contracts with terms of three to five years.

• In 2025, the endowment life insurance market will once again break the record for premiums. For 2024, the amount of premiums in this segment may amount to about RUB 1.5 tln (+167% compared to the previous year). The forecast for 2025 is RUB 1.6 tln.

SHORT-TERM POLICIES DROVE EXPLOSIVE GROWTH OF ENDOWMENT LIFE INSURANCE

According to the classification given in the Bank of Russia’s statistical tables, life insurance in the Russian market is divided into the following categories:

• Savings life insurance (SLI);

• Investment life insurance (ILI);

• Credit life insurance;

• Risk life insurance;

• Other life insurance;

• Pension insurance.

The first three categories are the most significant: they accounted for more than 95% of life insurance premiums in 2021–2023. SLI and ILI are together commonly referred to as endowment life insurance products. They demonstrated record growth in the first three quarters of 2024 (Fig. 1), predetermining the dynamics of the entire insurance market.

Figure 1. Endowment life insurance is growing at a record pace, RUB bln

Sources: Bank of Russia, Russian Union of Insurers

The increase in premiums for endowment life insurance was mainly due to demand for contracts with terms of up to one year, the contributions for which increased by 6.7 times over the first nine months of 2024 compared to the same period in 2023. In addition, contracts with terms of three to five years made a significant contribution to the acceleration of premium growth (premiums for them increased threefold from January to September 2024).

Figure 2. The highest growth rates of premiums were recorded for contracts with terms of up to one year

Sources: Bank of Russia, ACRA

The increase in premiums under contracts with other terms had virtually no impact on the overall dynamics. The absolute increase in premiums for endowment life insurance for the first nine months of last year amounted to RUB 717 bln, including:

• Under contracts with terms of up to one year — RUB 358 bln (50% of the total);

• Under contracts with terms of three to five years — RUB 297 bln (41.4%);

• Under contracts with other terms — a total of RUB 62 bln (8.6%).

Figure 3. The increase in premiums was driven by contracts with terms of up to one year and from three to five years

CONTRACTS OF UP TO A YEAR WERE popular DUE TO TAX ADVANTAGES

In 2021, the share of premiums under ILI and SLI contracts with a term of one year or less was 1.6%. This share increased to 38.6% in the first nine months of 2024, which was mainly due to changes in the taxation of income on deposits while maintaining the procedure for calculating taxes on income under life insurance contracts.

Prior to January 1, 2021, income generated by bank deposits was practically untaxed. Only income from deposits with interest rates significantly higher than the key rate could be included in the tax base, but only a portion of the income above a certain level was subject to taxation even for those deposits.

The system changed starting from January 1, 2021, but because of the deferral provided by law, actual payment of taxes on income from deposits received in 2023 began only in 2024. According to the new rules, all interest income generated by bank deposits, excluding the untaxed minimum (RUB 1 mln multiplied by the maximum size of the key rate in the year), is subject to taxation. As a result, for a depositor whose total deposit amount is within RUB 1 mln, the tax will be zero or insignificant, while for larger deposits tax may be significant.

At an interest rate of 10% and a deposit of RUB 10 mln, interest income will amount to RUB 1 mln. The maximum size of the key rate in 2023 was 15%, i.e. the untaxed part was equal to RUB 150,000. The tax base for this depositor is RUB 850,000. Depending on the tax rate — 13% or 15% — the tax on this income is RUB 110,500 or RUB 127,500, respectively. For simplicity, we will consider depositors with a rate of 15%: for them, the interest rate on deposits, taking into account taxes, is reduced to 8.7%. For larger depositors, the interest rate on deposits, taking into account taxes, can be reduced to approximately 8.5%.

At the same time, income from life insurance policies continued to be taxed using an approach that almost matches the one applied to deposits before 2021 where tax is paid only on the amount of income exceeding the amount calculated using the average key rate for the contract period. The resulting tax arbitrage drove the popularity of short-term life insurance policies in 2022. The rate of tax charged on the income paid on these policies in 2023 was much lower than that charged on the income from bank deposits. Therefore, high net worth individuals preferred one-year ILI or SLI policies with a guaranteed income to bank deposits. As a result, premiums on such policies soared almost tenfold in 2022, reaching RUB 58 bln compared to RUB 6 bln in 2021.

Against the backdrop of rising interest rates and funds in individuals’ accounts, premiums on short-term endowment life insurance policies continued to grow in 2023 and 2024, while many clients preferred contracts with a term of several months due to rising interest rates. As a result, the same funds could be used to purchase insurance policies several times during the year, which, in turn, led to an artificial overestimation of annual premiums.

Figure 5. Average premium per contract (RUB thousand) shows that policies with terms of up to one year are attractive to high net worth clients

Sources: Bank of Russia, ACRA

Starting from January 1, 2025, the taxation approach applicable to income received on ILI and ELI policies will be the same as for other interest income. As a result, tax arbitrage will be eliminated, which, in ACRA’s view, will lead to a sharp decline in sales of short-term investment insurance policies. The reversal of the trend will become noticeable as early as Q4 2024.

THE DESIRE TO lock in HIGH RATEs FOR SEVERAL YEARS IS DRIVING DEMAND FOR LONG-TERM INSURANCE CONTRACTS

The second fastest-growing segment of the endowment life insurance market is contracts with terms of three to five years. It is the largest segment of the specified market accounting for 48% of ILI and SLI premiums in 2021 and 40.4% in 9M 2024. The growth of premiums under such contracts accelerated in 2024: in the first nine months of last year, they more than tripled compared to the same period in 2023.

In ACRA’s view, this growth was driven by the following reasons:

• Clients’ desire to lock in high rates for a long period;

• Absence of alternative products with terms of over three years for a wide range of clients.

Figure 6. Premiums on ILI and SLI contracts with terms of three to five years grew rapidly in 2024, RUB bln

Source: Bank of Russia

Currently, the most popular are contracts with fairly plain terms and conditions: the total premium is paid at the contract effective date, and the client receives the payment, including guaranteed income, at the contract expiration date. The nominal income communicated to the client is much higher than the effective income calculated as compound interest.
For example, a five-year contract with a nominal rate of 21% (a common rate in the current conditions) offers 205% of the initial amount at the expiration; however, the effective rate is 15.4%.
On the background of the over 18% yield offered by five-year zero-coupon government bonds (valid for November–December 2024), insurers can offer these conditions and make a profit. Clients also seem to be satisfied with the offer. At the same time, there are no alternative products with similar terms available to a wide range of clients. In particular, the Agency notes that banks do not offer deposits with maturities of more than three years. From the seller’s viewpoint, the obvious advantage of an insurance contract compared to a bank deposit is that the client’s losses upon early termination of the contract are significantly higher than upon withdrawal of the deposit. Under these conditions, long-term endowment life insurance is a more stable source of long-term funding and is indeed able to perform an important function of attracting long-term money to the economy.

THE FORECAST FOR THIS YEAR IS MODERATELY OPTIMISTIC

The dynamics of insurance premiums until the end of 2024 and in 2025 will be determined by the following:

• A sharp fall in the sales of policies with terms of up to one year;

• Sales of long-term policies will be facilitated by persistently high interest rates and the absence of alternatives;

• Contracts with terms of over 10 years will become more attractive for clients if tax benefits are introduced for these contracts.

According to ACRA’s estimates, the total amount of premiums in the endowment life insurance segment will reach RUB 1.5 tln in 2024, which is 2.7 times higher than in 2023.

Elimination of tax arbitrage will constrain the sales of short-term policies in 2025, which will negatively impact the segment’s growth. At the same time, conditions for growth in the sales of long-term policies will remain favorable. Both of these factors will push the aggregate endowment life insurance premium by 7% up to about RUB 1.6 tln in 2025.

Figure 7. Endowment life insurance is expected to grow further in 2025

Sources: Bank of Russia, ACRA

the beginning of 2025, to significantly affect the total amount of premiums in the endowment life insurance segment. In terms of client base, ULI hinges on the clients who purchased ILI policies. Therefore, ULI is able to take some share of investment insurance premiums but not to bring substantial additional volumes to the market. ACRA estimates the aggregate potential of ILI and ULI segments for 2025 at RUB 340 bln.