Mitigating volatility within personal insurance portfolios through off-shore insurance

Author: Chaim Shalpid

The concept of volatility is generally used within the context of market conditions, such as stock market performance or share prices, with the specific intention of making investors aware of the multiple variables involved when investing and the potential risks associated with such decisions.

In as much as volatility and unpredictability are part and parcel of any type of investment decision, does such a concept exist with respect to insurance cover? To fully answer this question, we need to establish the reasons why individuals purchase insurance.

Insurance cover provides protection against life’s surprises, otherwise known as unforeseen or life-changing events. The rand value of the amount of life cover purchased is a constant figure that is not exposed to market volatility. As a result, the payout amount is always a known figure, which is adjusted annually on the policy anniversary when it increases by an inflationary amount. Now we know why individuals purchase insurance, but what about volatility within the confines of insurance cover?

For many years, South African residents were cut off from the world economy or global village due to sanctions. With the advent of democracy in 1994, things changed radically and suddenly we were invited to join the global and economic village.

Citizens could now invest off-shore, thereby creating a wonderful rand hedge against currency volatility and depreciation. In essence, this allowed local residents to ensure that their wealth did not reduce due to a weakening currency.

This rand hedge facility always remained within the domain of the investment world, and individuals with local rand-based insurance cover had their values pegged to the local currency. This meant that in rand terms, individuals had ‘x’ amount of cover, but on conversion to an off-shore currency, that figure was severely diminished due to currency weakness. In other words, due to the rand’s continuous weakening over the past 23 years, the concept of volatility with respect to an individual’s insurance cover has crept into the picture. Many South Africans have family living overseas. Interestingly, in rand terms, their local insurance benefits, if a life-changing event had to occur, could equate to a minimal amount when converted into a foreign currency.

So how do you protect yourself against such a situation? Within the local market, there are companies that currently offer what is known as off-shore life cover, where you can purchase off-shore insurance in US dollars and pay the premiums in rands.

Although the premiums will fluctuate on a monthly basis due to currency volatility, the insurance cover amount is based on a US dollar value with payments made into an off-shore bank account. Individuals now have the opportunity to not only create a rand hedge vis-à-vis their capital and investments but, when it comes to their personal insurance cover, can now also mitigate the volatility that exists with regards to currency fluctuation.

The underlying motivation for purchasing insurance should always be to protect policyholders and their beneficiaries against the effects of unforeseen events. If such products are not in place, families and beneficiaries could experience tremendous uncertainty within their lives.

But individuals who do have such products in place now have an added advantage – the opportunity to mitigate currency volatility by purchasing off-shore insurance, thereby ensuring that the true value of their personal estate is not eroded away by rand weakness and instability.