Growth proves unit-linked

Unit-linked products, particularly those offering variable annuity-type income guarantees, are the driving force behind the positive growth figures in the European life insurance industry, according to a report by the European Insurance Association (CEA).

The European life industry achieved total growth of 3.7% in 2004, bringing the total turnover to EUR551 billion - the first time premiums have exceeded their 2000 levels, according to the CEA report.

Across Europe, unit-linked products share of the market increased from 35 to 37%, with the largest increase coming from the UK where sales shot up from 70 to 78% of the market. A situation that may herald the death knell for the with-profits market there. In major markets, only Italy saw a decline in the proportion of unit-linked business.

Overall improvement in the UK market - the largest in Europe at 27.5% by premium - was one of the main success stories. Although inflation adjusted figures showed only a 0.8% increase, this represented a sharp improvement on the previous year's 10% fall.

With the CEA's report stating that the improvement in the industry's figures is a result of the changing demographic make-up across Europe, increasing mortality has put pressure on state pension systems, and governments have responded with attempts to increase the role of private pension providers.

The report highlighted the example of the 2004 tax change in Germany which removed capital gains tax advantages for endowment products in favour of private pensions. Products including lump sum payments saw new business figures to leap up by 35% as Germans seized their last opportunity to enjoy the endowment tax break.

The CEA also attempted to gauge the financial health of the industry by comparing changes in technical provisions or liabilities to investment returns. With total provisions reaching EUR4,375 billion in 2004, the CEA argued that growth in life investments from 103.8% of provisions in 2003 to 107% in 2004 was a "guarantee of better protection of insureds' interests".

However, the use of book value accounting in countries such as Germany, where levels of unit-linked business are low, makes such comparisons misleading. Declines in interest rates in 2004 and 2005 are likely to have substantially worsened coverage of liabilities on a realistic basis due to the prevalence of minimum guarantee rates.