The insurance companies operating in Hungary took the obligation to develop a uniform information system on the costs of life insurance products incorporating investment elements (unit-linked products) that are borne by customers. In accordance with that, the Life Insurance Department of MABISZ, the Hungarian Association of Insurance Companies, with the contribution of and support from HFSA, compiled the regulations for TKM (Total Cost Indicator).
The present TKM values of CIG Pannónia Life Insurance Nyrt.’s products can be seen here.
What does the TKM show?
TKM is a simple indicator, serving the interests of the customers, expressing the costs of that given insurance with one single percentage figure. Practically, it shows what would be the approximate yield loss for the customer in comparison with a theoretical cost-free yield, attributable to the fact that that yield was realised on the given unit-linked product.
How do we calculate TKM?
The TKM indicator is calculated through a typical example, as close as possible to the current average contract in the unit-linked insurance market. The model takes into account, in the quality of costs, the fees of insurance risks exclusively, mandatorily selected according to the contractual terms and it calculates using the average fee of the insurance market.
The typical example takes as its basis the following parameters:
- the insured person is 35 years old,
- the insurance period comprises 10-15-20 years (the calculation shall be made for all three of these), and for the lump sum fee products: 5-10-20 years, in the case of insurance contracts for the whole life, 20 years,
- the frequency of fee payment is annual, the payments are made by direct debit.
- For the calculation of the TKM, we assume contractual performance, that is, the contract is not expected to be redeemed or made exempt from fee payments prior to the pre-determined period, or terminated in some other manner (e.g. as a consequence of insurance service provided); fee payments are made in line with the maturity schedule.
Which costs are included in TKM?
In the framework of calculating TKM, we take into consideration all cost elements that reduce the investment result for the customer, including the fee for asset management, the costs of mandatorily applied risk insurance for life and/or accident insurance and the costs of acquisition, maintenance and administration.
The launch of TKM
The insurers who joined this scheme publish the TKM indicators for their unit-linked products from 4 January 2010. From the same date, the TKM indicators can be consulted on MABISZ’ website, in a summarised form.
In the documents handed over to the customers, the indicator shall be displayed from 1st July 2010, at the latest.
What are the advantages of TKM?
It is no secret that, with the introduction of TKM, the intention of the insurers was to make unit-linked insurance more transparent for the customers. Given that all insurers (having joined the TKM Charter) calculates the TKM indicators for their products using identical parameters, a cost-based comparison of investment-related life insurance became easier for customers, who are therefore in a position to make an informed decision on purchasing insurance products.
What else should be taken into account in connection with the TKM indicator?
The TKM indicator is important, but it is not the only significant point regarding investment linked life insurance. A not insignificant consideration is the character of the insurance coverage indicated in the proposal in question (accident or life insurance) and its scope, providing the insurance cover. As insurance is about long-term savings, it really matters how liquid a contract can be, what kind of additional advantages are offered by the company in servicing customers’ needs (e.g. a possibility to re-group investments online), what are the areas of additional coverage that can be used to extend the insurance - in short: how flexible the product is and how far it can be personalised.