Life Insurance Solutions Move Centre Stage in Asia’s Dynamic, Expansive Wealth Market
Life insurance solutions are increasingly vital for wealth planning for the world’s high-net-worth individuals, especially in a world of intense and proliferating regulation and compliance. The days of secrecy are gone, so the best that clients and their advisers can hope for is some degree of privacy. Gone, too, are the days of simple wealth protection through clandestine offshore entities and jurisdictions. Compliant and transparent wealth planning, structures and solutions aligned to a multi-generational family perspective are no longer a luxury, they are necessities. Eminent wealth management veteran Peter Triggs gave a thoughtful, informative presentation recently to a group of leading private bankers and other financial advisers on the central, and ever more important, role that life insurance solutions are playing in any well-devised wealth management strategy.
Triggs is a well-known personality in the world of wealth management in Asia. In May last year, he retired from his last full-time role at DBS, where he had been for seven years, most recently as Managing Director, Head of Regional Wealth Planning, and then Senior Adviser Wealth Planning.
But he is not letting the grass grow under his feet, and amongst other noteworthy roles is now consultant and partner for the 1291 Group, a Swiss wealth management advisory boutique for which life insurance solutions are central to their offering through its own and partner offices worldwide.
Formidable defence for HNWI families
“We are a new name,” he explains, “and 1291, by the way, comes from the founding year of Switzerland, when the three Swiss cantons of Uri, Schweiz and Unterwalden combined to protect themselves against their enemies and became a more formidable defensive force, after which other cantons joined to finally make what is Switzerland today. We are a Swiss firm, many of the 1291 seniors are Swiss tax lawyers, and we are very tax-driven in our approach.”
The 1291 Group boasts that it offers private wealth solutions for families in today’s newly transparent world. Clients have never needed wealth planning advice more than they do today, the firm’s literature states, as the traditional wealth planning tools are all facing challenges or attack.
Triggs’ presentation to leading wealth management professionals was to highlight the immense value of life insurance solutions and to offer the private bankers and other market players present some vital insights into how they can leverage their relationships with their clients to boost the penetration of insurance solutions.
Transparency and complexity
He began by remarking that never before has wealth planning for clients been as important as it is today, nor has it ever been as complex. “We now inhabit a transparent world, where clients so often have multi-jurisdictional needs and therefore are in need of advice to help manage their assets and those of family members dispersed around the world.”
Triggs explained that there are many diverse legal, regulatory and compliance issues, such as complex reporting in a world of CRS and FATCA.
“As we all know and recall,” he noted, “in the old days, one could set up an offshore trust, park assets there and little scrutiny would be brought to bear. But there is today far more oversight, not just of the clients themselves, but also of the advice and structures we offer to clients, so we must be particularly careful that the advice is appropriate and compliant.” Today’s advice will be subject to scrutiny.
The former landscape of wealth planning
Triggs then ran the audience through the wealth planning environment as it was and as it evolved over the past several decades, focusing first on the typical BVI entities, banking secrecy and numbered accounts.
The most popular wealth planning tool in Asia was always the famous BVI company, he explained, noting that more than 500,000 BVI, often bearer-share, companies had been formed, representing more than all the other offshore jurisdictions added together. “And about half of these BVIs emanated from Asia, and of course many of these used to have bearer shares,” he explained. “You would have clients with significant wealth held in a company the title to which was very often sitting in desk drawers.”
The first erosion of the efficacy of the BVI came in 2006 when legislation was passed to register shareholders so that the ultimate beneficial owner was then known. These are now disclosed under CRS reporting.
“Even more important is the CFC, or controlled foreign company, legislation adopted by most countries in the world over the last ten years, resulting in the person in control of an offshore company being taxed at home. In short, confidentiality has gone for the BVI companies, and tax advantages are disappearing.”
Moreover, Triggs added that if the BVI is carrying out a trading activity that shifts profits from the home base – what is known as base erosion profit shifting (BEPS) - there is the new substance rule that has prevailed since 2018-2019 to bar a company from reinvoicing or trading activities unless that entity has substance in the relevant jurisdiction.
“The BVI entity is not totally redundant today,” Triggs concluded, “but it is much less of a viable solution than ever before.”
The dissolution of bank secrecy
Triggs noted that bank secrecy has also fallen by the wayside. “Even Switzerland’s famous bank secrecy came under attack in the new century and then disappeared when, finally from 2017, they started exchanging information,” he noted. “As a result, an astonishing statistic that I saw from the Swiss National Bank showed that between 2006 and 2015, bank deposits in Switzerland sourced from developed countries dropped by two-thirds.”
Trusts at risk?
He explained that trusts have also been very popular in Asia and noted that there used to be estate tax in Hong Kong until 2006, and in Singapore until 2008. “People used to use the irrevocable discretionary trust, if they had assets in these jurisdictions, to avoid estate duties,” he remarked. “However, one of the problems with the trust is that, if you are living in a civil law jurisdiction, Indonesia, China or Philippines for example, your trust is going to be reported back to that jurisdiction, and as those countries do not officially recognise the trust structure, there will at least be some uncertainty about how your trusts will be treated.” In Indonesia, they are caught by CFC rules.
“For another example, if you live in a civil law, forced heirship or community property jurisdiction, how will your trust stand up against a legal challenge at home, now that everything is becoming transparent?” he pondered, rhetorically.
“Furthermore, we see countries like France specifically attacking trusts when there are connected parties who are French. And even the UK, the home of the common law trust, has decided as recently as 2017 that they will ignore trusts for any structure that has UK-residential property in it, for inheritance tax purposes. In short, trusts are now at risk of being challenged across the globe as more and more countries look for new ways to increase tax revenue.”
The Universal Life game has changed
Triggs turned his attention to universal life insurance (ULI), explaining that this first arrived in Asia on Hong Kong’s shores in 1997, and then Singapore a year later, with both TransAmerica and SunLife the prime movers amongst the carriers.
“Universal life has had a very good 20 years,” he reported, “moving rapidly from a relatively slow start to become one of the leading discussion points with clients seeking such solutions.”
He explained that ULI has been largely conducted on the basis of bank financing, as it is really a combination of life insurance and interest rate arbitrage, meaning that clients saw it as a way of obtaining a crediting rate into their account with the insurance company which was higher than their bank borrowing rate.
“The insurance company could reinvest at the long end of the yield curve at a rate higher than the crediting rate, and everybody thinks that’s a great deal,” he remarked. “But today, you have to be very careful because with the yield curve flattened, and interest rates fallen, the game has changed, and the risk has changed.”
The result, he extrapolated, is that, as client policyholders age, the cost of insurance mortality charges start to rise very steeply. Combined with possible falling crediting rates, this means ULI policies might disappoint and even lapse, as they usually don’t have a guaranteed payout, unlike a whole of life policy, which typically has a guaranteed payout on death.
“With universal life,” he elucidated, “the maturity of the premium is based on certain assumptions that your surrender value will maintain or continue to increase. But if your surrender value starts to come down, the game changes, policies collapse, or you have to have top-ups, and of course, that can mean very difficult conversations with the clients.”
Keep your finger on the pulse
Triggs therefore advised that banks and advisers with clients with ULI policies, particularly financed policies, should monitor them very carefully, make sure that the brokers are doing annual reviews, and see this situation as a good opportunity to have a conversation with those clients.
“Perhaps they need more insurance,” he commented, “but we have even seen cases recently where clients have decided that they will actually surrender the universal life policy and buy a whole of life policy. In Hong Kong, I heard of a case recently of a USD16 million premium ULI policy that the client cashed in, got back only USD14 million because of all the early year charges, and then bought a whole of life policy for the same insured amount for USD12 million. This means the client is actually up in cash terms and the policy is now guaranteed.”
Triggs concluded that the game is, therefore, becoming rather more complicated nowadays. “ULI is not the easy sell that it used to be,” he remarked. “I am not saying it is no longer viable, but universal life with bank financing is now riskier. Bankers, therefore, need to have conversations with the clients, but be careful, as bankers usually are not licensed insurers or brokers, so the best conversation should be about the client needs and not about products, leaving the latter to people who are properly licensed.”
The CRS tsunami
The biggest wave of change in wealth management smashed onshore across the world recently in the form of CRS.
“When the OECD first announced in 2014 that CRS and AEOI – the automatic exchange of information - would be introduced, the first reaction in Asia was largely denial,” he recalled. “Someone in Taiwan might say, for example, well, this won’t affect us because we are not even regarded as a country by the OECD. Indonesians were not worried because, for example, Singapore had stated it would only exchange information with countries that it was fully satisfied would offer confidentiality of data. And of course, country by country, they have all been proven wrong, with perhaps just one or two holdouts. If today you look around the world, most of the important jurisdictions have become parties to the CRS, and AEOI agreements.”
Any holes in the net?
Triggs then observed that after denial came some element of hope. “People then hunted for the loopholes,” he explained. “There were some, but the loopholes became well known and are now being closed, according to the Director-General of the OECD and today, realistically, nobody can rely on whatever loopholes they might think they have devised or heard of.”
Moreover, another barrier to non-compliance today is the arrival of MDR, the mandatory disclosure rules. “There are some very strict rules coming which will criminalise any advisor who advises clients on how to avoid CRS,” Triggs reported. “Not only will it become a criminal offence to advise clients on avoiding CRS, but it will be retrospective, which means if your client is caught in 10 years’ time for having avoided CRS and is asked where did you get that idea from, the original advisor could later face criminal penalties. These rules haven’t come to Asia yet, but I would assume they are going to come eventually.”
Triggs determines that wealth planning is absolutely critical to any wealth manager-client relationship today. But he said that as clients realise they need more advice, they will be cautious on who they turn to. Banks with very senior bankers have some advantage, he indicated, as they are more likely to enjoy the trusted advisor relationships that clients need, while banks with more junior, product selling RMs might suffer in comparison.
Today’s trends uncovered
Triggs moved on to the solutions on offer that are being sought most actively by Asia’s HNWIs and the ultra-rich. Family offices, private funds, private trust companies, alternative residence or citizenship, compliant tax planning, and life insurance without leverage are all increasingly in vogue.
“Clients in Asia require advisers who focus on needs rather than products, who concentrate on legitimate tax optimisation or deferral, who help them comply with CRS and with discretion and maximum confidentiality. Moreover, the best advisers recognise issues relating to civil and common law, work on structures to hold multiple asset types, that help bypass probate, that offer seamless distribution, creditor protection, and help provide optimal insurance solutions.”
Triggs closed in further on CRS. “Clients know they cannot avoid CRS totally today, but many people are very nervous about information about all the offshore private banking accounts or family trust information going back to the tax authority of their home country,” he explained. “Clearly there are unintended consequences and situations, for example, such as one very wealthy Brazilian family, who were faced with all of their wealth being reported back to the Brazilian tax authority, fearing that just one rogue employee in the tax office releasing information to any of the many gangs, would mean that their family would be in serious danger.” They felt obliged to leave the country.
In short, CRS information disclosure and exchange has a lot of risks, and it is not just about tax. There are political risks, and there are physical risks when this information gets into the wrong hands. “That is why one should focus also on the level of CRS reporting information,” Triggs elucidated.
He added further insight into the structure in relation to both civil law and common law, saying that so many clients will have assets in different jurisdictions around the world. “And structures must accommodate multiple asset types,” he added, “so while many trust providers and trustees are very happy to take financial assets, often those financial assets for a very wealthy family are a relatively small part of what they have, as a lot of the real wealth is in businesses and commercial property so they need a structure that can really help them with their total wealth, not just the financial assets.”
The avoidance of probate is also very valuable, as it reduces delays for the beneficiaries, it reduces publicity and avoid high legal costs. And Triggs stressed how liquidity needs are essential to address, so the family can pay any requisite estate taxes and inheritance taxes, and cope with the other outgoings arising at the time.
Triggs also stressed how clients want as much control as possible. “So,” he said, “we are seeing a huge trend towards the setting up of family offices, and Singapore is a major beneficiary, as it offers tax exemptions for single-family offices, especially the 13X tax exemption. And the big picture is that some clients have been losing faith in their private bankers to some degree, so they want to get more independent advice. To get unbiased recommendations, they seek advice from someone who doesn’t have an agenda, hence the rise of the family office.”
Similarly, private funds, and private trust companies are being set up. “And linked to all this,” Triggs reported, “people are taking up alternative or secondary residence or citizenship options to help them both with lifestyle, family location, as well as tax planning and efficacy.”
PPLI in the spotlight
With that, Triggs moved on to focus on PPLI, or private placement life insurance, a product that he and others believe will be increasingly prominent in the foreseeable future. “The world is changing, and we believe PPLI will be a real market leading wealth solution within the next couple of years,” he stated.
“A new question for clients today, therefore,” said Triggs, “is to ask them if they have thought about putting their assets into the name of a life insurance company. The question works, and generally opens up a good two-way dialogue with the clients.”
PPLI, he elucidated, has a number of key benefits for clients, including more discrete CRS reporting, avoidance of probate, a viable distribution plan, the flexibility to cancel, withdraw funds, reduce life cover, the opportunity for tax deferral, worldwide recognition, creditor protection, possible high life cover and (under a private investment company) the option to hold multiple asset types.”
For bankers, he explained that the PPLI offering helps retain assets for the bank, attract new assets and new clients, provides revenues on non-bankable assets and even assets with other banks, brings upfront fees and trailer fees, and assists with differentiating the bank with clients by bringing a new product offering into focus.
Triggs offered attendees more detail on the structure, pointing to a diagram in his presentation. He also talked delegates through 1291’s tax-efficient solutions for about 40 different countries around the world, working with some 25-30 different insurance carriers (for non-residents of Singapore) for very specific reasons.
Multiple layers of experience
He then offered the guests some further insights into 1291’s culture and areas of expertise, adding that the firm had recently completed a very large and innovative deal for a client with low levels of cash but high levels of stock in his company, which had listed within the past year. No bank wanted to give him single stock financing to finance the very large insurance deal he wanted, but through 1291 they arranged non-bank single stock financing that helped him obtain a USD30 million premium whole of life policy.
“This illustrates how we achieve solutions that might not be available elsewhere,” Triggs explained. “We also specialise in tailored solutions for US clients, with the ability through insurers we work with to issue a US compliant policy to US citizens. Moreover, we can manufacture great solutions for a wide range of countries, for example, for Japanese clients, European clients, Asian clients and many others from the 40 different jurisdictions we cover. We have even forged expertise in a variety of niche areas, such as private jet financing, yacht financing, mergers and acquisitions and gold custody.”
His final word was to invite the delegates to consider partnering with 1291 Group, which is licensed as insurance brokers or financial advisers in over 30 different countries and that has ongoing cooperation with 25 insurance companies in 10 different jurisdictions.
Global reach, global clients, and a global product suite
“We have a global team of leading experts with broad knowledge, language skills, and excellent technical knowledge,” he concluded. “They have a deep understanding of the regulatory issues, who know how to work closely with regulators, associations and government agencies to achieve the best outcomes for the clients. And importantly, the team members understand the challenges and needs of all parties involved, whether it is the client, the bank, an intermediary, the insurer, and how to work effectively with the legal and compliance experts in-house and in external firms.”
“Whoever you work for, and whoever you partner with, if you aspire to be a true trusted adviser to your client, the bar is being raised.”
More from Peter Triggs, 1291 Group