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The benefits and risks of savings insurance in Cyprus

1. The benefits

1.1. Reduced risk - Risk diversification

Savings Insurance manages a particularly successful risk diversification, such that no independent investor could accomplish alone.

Savings insurance funds place investors’ assets in multiple certificate of deposits in triple A banks institutions in the USA, Germany, UK and Switzerland.

Funds of a clear investment nature invest investor’s money on bonds and stocks from different industries and countries.

This practically means that the safety of the contracting party’s savings does not depend on the credit rating of any individual organisation, industry, or country.

An independent investor would have to possess a particularly high investment capital to be able to effectively diversify risk, since most investments abroad require a minimum amount for investment (e.g. 10,000 euro).

1.2. Professional Management

Investment funds are handled by professional asset and fund managers who employ the most current investment methods and with the use of advanced technological means, are able to continuously watch markets, so as to ensure that the investors’ capital will have the expected returns.

1.3. Discipline for Saving

Savings funds are structured in such a way so as to become a long-term saving commitment.

For a period that lasts up to 4 years, the insured party essentially has no access to the contract’s redemption value, since that would mean a fine of up to 25% of the contract’s value.

This way, you as investors are discouraged to use funds that set for achieving your long-term goals. 

1.4. Flexibility

As has been previously mentioned, having a savings insurance policy is mostly meant to cover necessities on a more long-term basis.

However, life can be unpredictable and there may come a time when you need immediate access to your capital in order to cover for an emergency like a health issue, or an unscheduled change of vehicle or equipment.

This is why savings policies usually give you the opportunity to access and withdraw part of your capital at regular intervals.

2. Risks

2.1. Market Risks

This is a danger that mostly concerns high-risk funds, since clients’ capital is invested in stocks.

Stock prices are naturally affected by international financial and political events, which are, by definition, unpredictable. In times of economic recession, stock prices might dramatically drop.

Investors with short-term or mid-term goals should avoid investing in financial products characterised by a high degree of fluctuation.

2.2. Risk of Asset Freezing

Insurance companies are the only entities licensed to sell savings products eligible for a tax deduction in Cyprus.

There are two kinds of insurance companies in Cyprus, local and international ones.

International insurance companies that are based in Cyprus are essentially branches of large international insurance companies. Local insurance companies, on the other hand, belong to Cypriots who are merely cooperating with international insurance companies.

Regardless of whether it is local or international, an insurance company has no right to make investments.

All insurance companies hand over their clients’ money to investment banks or investment companies who then handle their management.

In no way does the bankruptcy of an insurance company automatically equal the loss of clients’ money, since its actual ‘guardians’ are investment banks and companies.

In case an insurance company goes bankrupt, another insurance company will take over the management of the savings funds.

The only risk for the investor in such a case is that by the time this transition is completed, they may not have the capability of redeeming their contracts. That means that some investors who might need immediate liquidation will not be able to access their capital.

This is why investors should only trust insurance companies with the highest credibility rating.

2.3. Bankruptcy Risk of an Investment Organisation

The real question is - how likely is it for an investment organisation to go bankrupt?

The sheer financial size of these companies is larger than that of several developed countries. Indicatively, BlackRock, which is the biggest investment company in the world, manages assets worth $3 trillion, and that is twice the size of Japan’s GDP - the 3rd largest economy in the world.

Unlike states and countries, these companies are also under constant scrutiny and controls from independent regulatory authorities with a particularly strict legal framework.

If companies like BlackRock, Pimco, The Vanguard Group, JP Morgan etc are under risk of bankruptcy, then it is just as likely that any commercial bank in the world is under the same risk multiple times over, since that will mean a generalised global financial crisis of an unthinkable size.

Even in the highly unlikely case that one of these investment companies does go bankrupt, its portfolio will be bought out by another investment company that will take over its management. In such cases, there might again be some difficulties regarding the liquidation of investors’ funds.

2.4. Inflation Risk

It is a given that cash with zero returns and certificates of deposits with particularly low yields cannot cover inflation damage.

Low-risk investment funds cannot cover for inflation damage either, if inflation is higher than 5%.

Low-risk funds should be exclusively selected in times of economic downturn or times of low inflationary pressure.

If you have any questions after reading this article, please contact us at [email protected] or call our contact line at 700 70 500.

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