I understand that the bank essentially buys from me an insurance against a catastrophic market failure, but are they paying me the right price for it? E.g. how does this product compare to a pure uncapped investment in the same index?
The easy part of your question to answer is that there is no comparison of this product to a pure uncapped investment in the same index. The two have vastly different R/R elements. As for paying you the right price, that requires a much more complex answer...
Structured products like these are based on complex option strategies. There are many variations. A common one in the US is a one year cap of 8% with no risk for the first 10% of price drop that year. The components are:
- An out-of-the-money covered call component is responsible for the cap
- An at-the-money long put is provides the protection of the principal, down to a certain value
- An out-of-the-money short (funding) put is responsible for the level below which you begin to lose money
I've probably already lost you so let's look at the big picture. The provider (insurance company, bank, etc.) is providing 10% indemnification. If this was done by the investor on the SPY, for that same 8% cap, he could have 18% of protection per year. That's where the performance differs. With the provider's product, if the SPY were to drop 18%, the investor would lose 8% which the provider would keep. Indirect fees!
Another drawback with this type of investment is dividends (if the underlying pays them). Stock exchanges reduce share price by the exact amount of the dividend on the ex-dividend date. These structured products tend to ignore this and that's an additional barrier to profitability. IOW, with the SPY at 300 with a 1.85% annual dividend, over the course of the year, share price will be reduced by about $5.45. If your payout occurs one year from now above opening price, the SPY must appreciate $5.45 before you get into your profitability range. The provider is pocketing the dividends. Indirect fees!
Each structured product is different so you have to drill down in order to understand what is actually happening and that's not always an easy thing to do. The big picture is that there are no free lunches. The provider is offering you an investment product that underperforms the actual investment combination of shares and options.
This isn't some theoretical application for me. I use this strategy. I recently did one on a $103 stock for January of 2020. I'll collect one dividend of $1.00. If it drops no more than 17.5%, I'll pocket $185 (not much of a profit but it's not a loss). Below that, I'll lose $1 per share for every $1 the stock drops. My cap is at $110 where I'll earn the maximum of $6.85 or 6.6% which annualizes to 23.8%.
So to answer your main question, the provider is not paying you the right price for this investment. You only get that if you DIY.