Unit-linked contracts
Savings life insurance contracts where investment risk is borne by the policyholder, whose savings track underlying assets.
Unit-linked contracts are savings life insurance contracts in which the policyholder's savings are invested in units of underlying assets, equity funds, bonds, real estate, whose value fluctuates with markets. Unlike capital-guaranteed euro contracts, where the insurer bears investment risk and guarantees the capital, unit-linked contracts transfer this risk to the policyholder: the contract's value rises or falls with the performance of the supports, with no capital guarantee. For the insurer, this transfer of financial risk to the policyholder reduces capital tie-up and the balance sheet's sensitivity to markets, which explains the growing orientation of inflows toward these supports in an environment where capital guarantees are costly. Under IFRS 17, these contracts often fall under the variable fee approach. For the policyholder, they offer higher return potential in exchange for a loss risk, raising issues of advice, suitability to the profile and consumer protection, under the vigilance of conduct regulators.
Textbook case: a unit-linked policyholder sees their contract's value fall during an equity market drop, bearing an investment risk not carried by a guaranteed euro contract.
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