Where the growth is - long-term care

A decade of phenomenal growth in the economy and an insatiable desire to buy more houses has led to a boom in Spain's life-insurance sector. But with the rise in interest rates and predicted slowing of the economic growth, there is expected to be a levelling out of the rise in purchase of life insurance.

That said, it is predicted that the economy will continue to rise. With a gross domestic product (GDP) at over 3%, the life sector is perceived as a still-developing market, and has been earmarked as one of the potential growth areas for global (re)insurers.

"The boom is linked to real estate and mortgage credit," said Miguel Alferieff, managing director of SCOR Global Life Iberica. "In Spain, buying a life-insurance policy is not compulsory when granting a loan or mortgage, but the banks want borrowers to have a life policy."

According to the most recent report on Spain by Standard & Poor's (S&P), the relatively low penetration of life-insurance products offers opportunities, supported by the demographic trend of a rapidly ageing population and the expected increase in disposable income per capita.

That said, there are some issues in the Spanish market:"Spaniards are inclined to hold disposable income in cash and then invest it in property, rather than build up additional savings through life-insurance vehicles," stated the report.

Real-estate boom

Until recently, the life-insurance sector has been a very volatile market. During the previous 10 years, insurance companies and banks have had to overcome fears from customers after a fragmented fiscal environment damaged investors' confidence in life products.

However, in the past two years, the life market has proved very interesting - and profitable - showing steady growth year on year. The property-market boom has provided the spur to this growth, and many Spaniards have been putting any extra money into second homes. In 2006, there was such an appetite for real estate that construction levels in Spain were equivalent to those in France, the UK and Germany put together.

The boom in construction has been reflected in the volume of loans and mortgages taken out. A very competitive lending market has led to borrowers being allowed to borrow up to 80% of their annual earnings.

What this means is that a rise of 1-2% could lead to a big financial squeeze for the borrower, leaving banks and insurance companies who have specialised in this area having to look at diversifying their book of business away from just these specific mortgage-related life produces.

"The banks and the insurance companies will be fine if there is a slow-down - they will find new markets," said Mr Alferieff. "It will be the customer who will be affected, who may lose money. The banks and insurance companies are big financial institutions that have big money behind them."

This rise in interest rates may actually make life-insurance products look more attractive, and already there are new savings-related products being rolled out by the banks and insurance companies. But the market remains attractive and full of potential for growth.

"The demand for life insurance is slowing, but not decreasing," said Mr Alferieff, who also said that SCOR still expected to reach all of its life targets by the end of 2007.

There are two widely differing opinions on what the interest-rate rises will mean. On one hand, the glass-half-full brigade say this is the end of a time of boom. The others say that this is not the tip of an iceberg, and there is actually nothing lurking under the waters, as, after all, GDP for 2007 is still projected to grow at 3.3%.

New product

Plan Individual de Ahorro Sistematico (PIAS) is a new savings product that was rolled out on 1 January 2007 after changes in the law made it possible to take out this low-tax savings option.

To date, over 30 life-insurance companies and banks have started to offer this life plan - which represents about 50% of the market taking up the product. It is a life-savings plan whereby, if you keep it for 10 years and then convert the indemnity into an annuity, the tax is reduced. The appetite for this low-risk product is expected to grow.

New law

A new law has just come into effect that means all life-insurance companies have to file all life policies and details of their holders in a central file. This means that after a holder passes away, their families can easily trace some of the smaller policies that have slipped through the cracks in the past. This will certainly lead to higher-volume claims, but the amounts will be small as they are usually sold in a telesales credit-card deal.

Potential growth areas

The Spanish government has recently put in place a new law or public scheme for long-term health care, which came into effect on 1 January 2007. Spain, like the rest of Europe, has an ageing population, and the care of this population is causing concern.

For the moment, the details of the scheme have not been worked out fully, and it appears to have no impact on the life market. But it could have ramifications in the future. No one knows what will happen with additional private long-term care. It may be that it can be tacked on (although unlikely), or people may wish to buy additional private cover if they see the state scheme as inadequate.