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Expat Investor : September October 2009
September/October 2009 EXPAT INVESTOR 19 INVESTMENT select a well run, reputable and successful provider with strong financial backing. Although ongoing corporate robustness is never guaranteed, the more financially secure and established a company is, the lower the chance of it being unable to meet its financial liabilities becomes. Layer 2 -- regulatory safeguards In most jurisdictions, providers will be asked to audit accounts at least yearly for rigorous inspection by the regulator to ensure proper accounting records have been maintained. This is not only to ensure that a company is fulfilling its corporate and operational requirements, but also so regulators can see that companies are not acting inappropriately with their customers money. Something called 'solvency Protecting your investments With any investment, it's important to understand the risks involved and the elements of protection that exist. We have recently seen a number of sizeable financial institutions fall into difficulty, so it has become increasingly important that people understand how safe their investments are - and that companies do all they can to make sure their customers know about the existing safeguards. To customers of offshore investment policies, there are two main risks -- the risk that the available assets of the life company are inadequate to meet its liabilities and the investment risk. But there are several layers of investor protection available to provide security. Layer 1 -- choosing a financially secure provider When investing, it is important to policies requires a life company to keep its LTBF separate from its general business accounts. If a company goes into liquidation, the Court will appoint a liquidator to wind up its affairs. The liquidator's main aim will be to realise the company's assets to pay its creditors. Customers generally have absolute priority over all other creditors and the ring-fenced assets are earmarked for policyholder/ client liabilities and cannot be used for other purposes. With customers' assets segregated from the company's own, the liquidator cannot access policyholder funds if a company fails. Layer 3 -- compensation schemes Policyholder protection schemes allow customers to claim for compensation in the unlikely event margin' indicates the ratio of assets versus liabilities within an organisation, and provides a good indicator of the financial stability of a company. For example, the Isle of Man Insurance and Pensions Authority monitors any falls in solvency below 150%; therefore, having a solvency margin in excess of this shows that the business is being managed in a sensible way. A company may be unable to meet its liabilities if it goes into liquidation. Subject to jurisdiction, a number of safeguards exist to protect policyholders. One example is the Isle of Man Insurance Act 2008 which: requires Isle of Man life assurance companies to set up a long-term business fund (LTBF) to hold the assets linked to customer policies restricts how these assets should be used, i.e. only for the purposes of meeting liabilities of the customer Phil Oxenham, Marketing Manager for Skandia International, explains the layers of protection available to expats seeking to safeguard their investments. that the provider company becomes insolvent. This protection only applies if the life company is unable to meet its liabilities and does not cover any loss incurred as a result of the underlying investments. Layer 4 -- investment risk By diversifying the underlying investments, many of the risks associated with reliance upon one particular fund or asset can be reduced and adds a further 'safety net'. The principal choices are between cash, bonds, property and shares or equities. Not only do they have different risk/return characteristics, but they also behave in different ways; the theory being that when one asset class is losing money, others may be making it. An independent financial adviser can help you construct a portfolio that matches your attitude to risk and loss and targets the returns needed to fund your requirements. How you choose to invest your money is up to you and while many life companies provide tools to facilitate this process, the final decisions, and the risks, ultimately lies with the customer -- which really highlights just how useful a financial adviser can be. Unless it provides some for m of guarantee, the life company doesn't hold any responsibility for the perfor mance of the investments. The value of the product will be directly linked to the performance of the chosen bank deposits and investments, generally managed by third parties such as banks and fund management companies. These third party investment providers will have different levels of customer protection surrounding them -- and those levels will depend upon the jurisdiction where the third party is regulated and may differ for investments held within a policy. For example, if an investor chooses to put part of their portfolio into a UK-registered mutual fund, then their investment will be ring-fenced and kept safe in the event that that fund company goes bust. Many offshore providers offer access to a variety of investments -- and you can switch between these in order to match your risk profile and market conditions. By using this flexibility and ensuring that investments are adequately diversified, you can make full use of layers of protection available and gain added security for your investments. This is clearly a very important process to work through not only when initially opening any type of investment account, but at every stage of its life. Therefore having advice and support throughout the decision making process is undoubtedly something all investors and potential investors should consider.