Financial News: Interview with Ilya Smirnov in the newspaper Kommersant.

On July 1, Law No. 172-FZ came into force, introducing a new insurance product to the market – ISZh 2.0, an updated version of investment life insurance (ISZh), which will be prohibited starting January 1, 2026. What this means for policyholders and which regulatory acts the Central Bank plans to adopt in the field of life insurance in 2027 were explained by Ilya Smirnov, Director of the Insurance Market Department of the Bank of Russia.

“Clients experienced problems related to coercion and misselling”

– Why was it necessary to introduce entities such as insurance with declared and calculated returns?

– Before answering this question, let’s look at the nature of endowment and investment life insurance, ELI and ILI. For a long time, there was no separate regulation for these products. The procedure was stipulated in the law “On the Organization of the Insurance Business,” where it was noted that during life insurance, the insurer may pay, in addition to the insurance sum, part of the investment income.

Both instruments were marketed as investment options, with the insurance component being minimal. The fundamental difference between them was that the owner of a life insurance policy (NSZh) believed in the insurer’s success, in their ability to manage assets and generate profits. Those who chose investment life insurance (ISZh) believed in the assets themselves, on the performance of which the future investment income depended. Meanwhile, the insurer often did not purchase the asset itself, but derivatives linked to it to hedge their risks.

– What does this mean in terms of the product structure?

– A significant share of NSJ products consisted of insurance programs with guaranteed income that were understandable to a wide range of consumers. For example, when a client’s premium was 100 rubles, at the end of the contract they would receive 110 rubles. Their share was projected to be 96% by 2025. At the same time, there were NSJ policies where the insured amount was comparable to the insurance premium. In our example – 100 rubles. On a certain date, the insurer declared additional income, which depended on investment results. When protection against additional risks was included in the insurance coverage, the size of the insured amount for the survival risk, that is, upon the expiration of the policy, could even be less than the paid premiums. In such situations, the possibility of receiving investment income allowed the client at least to partially compensate the costs of the insurance itself and to ensure a minimum return on savings comparable to the inflation rate. Based on the results of 2018–2020, the declared yield of these products fluctuated on average from 5% to 8% per annum, which was comparable to deposit rates at the largest banks.

In the life insurance segment, the situation was less transparent. Clients encountered problems related to coercion and mis-selling, difficulty in understanding exactly what they were purchasing. Very often clients were offered life insurance disguised as a bank deposit, or sellers deliberately did not explain the difference between these products. Clients were essentially promised high returns, yet they did not understand the risks they were taking, which could lead to the loss of all invested money. And if a client wanted to terminate such a contract, the surrender value was usually significantly less than the insurance premium they had paid. Consumers complained to the Bank of Russia about these problems. Meanwhile, on average across the market, the annual return on life insurance policies almost never exceeded 5%. An exception was contracts with a term of less than three years issued after 2023. Also, many completed contracts recorded losses: the client received less than originally paid, since the contract terms did not provide capital protection. As premiums grew proportionally, so did the number of complaints against insurance companies and banks acting as intermediaries in policy sales.about Most complaints were related to the client’s disagreement with the amount of investment income.

– How did you solve this problem?

– We issued a directive that established rules for investment insurance products, which have been in effect since March 2022. In particular, the “cooling-off period” was extended, the list of possible exceptions from insurance coverage was limited, requirements for minimum insurance amounts for death and survival risks were introduced, standards for pre-contractual disclosure of information about the terms of contracts, as well as the historical profitability of such products, were established.

These protective measures did not apply to contracts amounting to 1.5 million rubles or more. It was assumed that such contracts were concluded by sufficiently prepared people who could independently understand the terms and features of the product. I note that after the introduction of these requirements, there are practically no offers on the market for IJS programs amounting to less than 1.5 million rubles.

Subsequently, the watershed of 1.5 million rubles ceased to represent the conditional division of clients into those whose interests require protection and those who are capable of making risk decisions independently. Unfortunately, the practices of selling life insurance with investment savings (LIS) did not improve significantly, so the sales of this product were prohibited. At the same time, the development of a new product began — unit-linked life insurance (ULI). The ideology behind its market introduction was to provide both insurers and policyholders with a clear, simple investment insurance product, the investment component of which should be as transparent as possible for the client, and the client should be protected from excesses on the part of the insurer. The investment component of ULI is represented by shares of mutual funds — instruments that have their own fairly detailed regulations protecting the interests of the shareholder.

“Clients can be different, and their appetite for risk may vary”

– Was the introduction of the DLG insufficient to replace the ILG?

– Even during the development of DСЖ, the insurance market approached us with an initiative to preserve a more flexible investment instrument for wealthy clients willing to take on higher investment risks. They made requests that differed from the needs of the average insurance client: these included the need to transfer property to the beneficiary in case of death not through the inheritance mechanism, as well as the search for more profitable instruments.

Agreeing that clients can be different and, accordingly, their risk appetite can vary, we supported the market initiative. Six months after the legislative ban on the sale of new unit-linked insurance policies, from July 1, 2026, life insurance with calculated returns appeared. This new product, Unit-Linked Insurance 2.0, is available only to qualified investors with a lump sum payment of more than 6 million rubles.

– How does insurance with calculated yield differ from life insurance with a savings component? What does its introduction offer to investors?

– These are quite structurally different contracts, although they can be grouped into the category of investment insurance products. Insurance with calculated returns is a more flexible, but potentially more profitable and, accordingly, somewhat riskier instrument. The assets in which the insurance premium can be invested are limited to the basic assets provided by the law “On the Securities Market.” And this is a very broad list, covering almost all possible options: ranging from stocks, bonds, and mutual fund units to stock indices and derivative financial instruments.

Funds under life insurance contracts with a savings component (DSZh) can only be invested in units of open-end mutual funds (OPIFs) or closed-end mutual funds (ZPIFs); the purchased units belong to the client as their property, and even in the event of the insurer’s bankruptcy, they will not be lost. Meanwhile, the assets in which an insurer invests under life insurance with a calculated yield belong to the insurer – and accordingly, the risk of the insurance company’s bankruptcy lies with the client.

At the same time, both unit-linked life insurance and life insurance with a return combine classic life insurance and the opportunity to earn income from investments. However, in unit-linked life insurance, the client receives this income in the form of changes in the value of the units of mutual funds purchased for them, while in life insurance with a calculated return, investment income is paid out. The procedure for calculating and paying investment income is specified in the contract. It outlines the calculation formula and the indicators on which it depends. These can be any economic indicators, such as quotations of financial assets — stocks, bonds, mutual fund units, prices for precious metals and commodities, exchange rates, index values, etc. At any time during the contract period, the client can request from the insurance company information about the dynamics of the investment income and the values of the indicators affecting its amount. The company is obliged to provide it.

– Insurance with declared yield? How does it differ from life insurance contracts and what does its introduction offer to investors?

– Life insurance with declared returns is fundamentally no different from NSJ. Overall, it is the same product: the insurer declares additional income on a specific date, which depends on the results of its investing. The purpose of the law was to systematize insurance products with an investment component. The current changes are intended to prevent negative practices. Now, if the contract allows the client to receive investment income in addition to the insured amount, it can only be either life insurance with declared returns or life insurance with calculated returns. There is no third option.

– What features of contracts with declared and calculated yields should private investors pay attention to?

– Although life insurance with declared returns or life insurance with calculated returns are investment products, there must necessarily be an insurance component. Therefore, when signing the contract, the client should pay attention to which risks are insured and how they relate to their needs. It is also important to understand that investment income is not guaranteed. At the same time, a life insurance policy with declared returns can be structured so that the insurer specifies a minimum or average income amount in the contract and, in addition, provides the possibility to pay additional investment income beyond the guaranteed amount in case of successful investing.

– What regulatory acts does the Central Bank plan to adopt in the field of life insurance in the medium term?

– In 2027, we plan to issue a directive that will regulate life insurance. Something like an update of the requirements provided for in the directive on the minimum requirements for the implementation of life insurance with an investment component. We intend to highlight the general provisions characteristic of all life insurance, as well as the specifics inherent in its individual types. At the same time, most likely, we will not provide any additional regulation regarding insurance with calculated returns, or it will be minimal. I believe that the restrictions provided by law on the availability of such products only to qualified investors with a single payment of 6 million rubles or more are sufficient.

In addition, we plan to standardize the rules for informing clients using the key information document (KID). We want to make it more universal, eliminate duplication of provided information, so that clients receive only important details about the contract terms in an accessible form in the KID.

Regarding the development of life insurance regulation, work is currently underway on a draft law according to which the insurer will become the sole tax and payment agent for contracts of this type of insurance. All payments for life insurance, including the investment part – for redeeming mutual fund shares – will go through it. It will calculate and withhold the tax. This innovation will greatly simplify the administration of life insurance products for insurers and may make them more popular among consumers.

I would also like to remind you that starting from January 1, 2027, a system for guaranteeing rights under life insurance contracts will come into effect, similar to deposit insurance systems in banks and pension fund assets in NPFs. It will apply to all life insurance contracts active on that date and those concluded thereafter, covering their insurance components. The scope of the guarantee includes policyholders’ rights to receive payments upon the occurrence of insured events and the surrender value in case of early contract termination, as well as the refund of the insurance premium during the cooling-off period—within the limits of 2.8 million rubles, and in the event of the insured person’s death—up to 10 million rubles. We have prepared the regulatory framework necessary to launch this system. It will enable effective protection of clients’ interests if the insurer’s license is revoked. This will increase consumer confidence in savings via life insurance and make such products more attractive.

Pyotr Rushaylo, Kommersant