Viability of Universal Life insurance in Brazil from the supply and demand perspectives

Abstract

The aim of this article was to evaluate the viability of Universal Life insurance (UL) in Brazil from two perspectives: from the individual viewpoint of policyholders, considering different client profiles and investment scenarios; and from the company viewpoint, verifying whether insurers see sales advantages in UL. Thus, despite the lack of definition of the regulations on these contracts by the Superintendence of Private Insurance (Susep), this article’s contribution lies in evaluating UL – a typically American product – in Brazil, using an entirely actuarial methodology, for policyholders and insurers, according to local parameters. The relevance of the article lies in strengthening the support for individuals, companies, and authorities to evaluate the product and discuss its implementation, even identifying the most favorable profiles and scenarios for its development. Although the UL is an individual modality that is widespread in several countries and its design exploits welldefined attractions, the product has not been explored in the national literature. The methodology adoted in this study used fully actuarial modeling, the internal rate of return (IRR), and profit testing. The study reveals that the Brazilian market for UL is viable, especially due to the higher interest rates compared to countries where the product is already widespread. From a demand perspective, the results indicate that the policyholder would be in a more advantageous position acquiring UL than buying life insurance in the private market and investing the surplus in financial assets, due to the hybrid characteristic of the contract, which enables the use of financial returns as discount factors in the insurance portion and operational charges, reducing the opportunity costs linked to the product. With regard to companies, the profit testing  results suggest there are stimuli for the supply of UL, provided the operation has a long-term bias. Altering the mortality pattern, policy type, and the company’s investment profile, all the results point in a similar direction.