Will rising interest rates make life insurance less attractive?

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This is not a halt but a shift in the dynamics of life insurance collections. In July, net inflows on this flagship French savings product reached 800 million euros, according to the latest figures from France Assureurs. This is better than last June (600 million) but it is almost half as much as in July 2021 (1.4 billion). Despite everything, underlines Franck Le Vallois, Managing Director of France Assureurs, premiums (gross inflows) for the first seven months of the year reached a historic peak since 2010 at 88.4 billion euros, of which 41% invested in units of account (UA).

Still, the context has radically changed in a few months. The savings of the French, after having experienced stratospheric levels during the health crisis, are beginning their slow decline. Soaring energy and food prices pushed inflation to levels not seen in decades, prompting central banks to suddenly raise their key rates.

A movement which has mechanically resulted in a doubling of the interest rate on the Livret A to 2% since August, and a jump in the wake of collection on this liquid and guaranteed investment. According to certain projections, this Livret A rate could even be raised to 2.5% next February. Finally, the financial markets are no longer as buoyant as in previous years, with now a permanent risk of a relapse. However, it is during periods of low water that the commissions levied on life insurance become the most visible for policyholders and make them more picky about the performance of their contract.

Stronger outflow on euro funds

Despite the decline in the stock markets, it is still units of account (unsecured vehicles invested in many assets, mostly equities) that continue to drive inflows, well helped it is true, by the success of savings plans individual pension (PEP). Since January, unit-linked inflows have represented 23.4 billion euros, while euro funds (with guaranteed capital, mainly invested in bonds) – and which still represent nearly 90% of total insurance outstandings – life- amplified their outflow to 10.5 billion euros, i.e. practically the level reached throughout 2021 (11.8 billion euros).

A sudden acceleration of redemptions on euro funds is the new nightmare for insurers. If the rise in rates is beneficial in terms of solvency ratios and better performance over time of the asset, a too rapid rise in rates accompanied by an increase in redemptions would result in capital losses on the portfolio.

Hence the importance of maintaining a certain attractiveness of the euro fund, particularly with regard to the Livret A account. Admittedly, the two products are not comparable. But all professionals agree that savers, especially the most modest, those whose proportion of their life insurance invested in euro funds is the largest, compare the rate served by the two media.

Competition from Livret A?

In 2021, according to the ACPR, the average return on the euro fund was 1.3%, or even 1.08% according to estimates by the firm Facts & Figures on individual life insurance. Faced with a Livret A of 2% or more, or even new, more profitable products such as bonds at maturity, insurers will therefore be forced to make a move this year on euro funds. Cyrille Chartier-Kastler, founder of Facts & Figures, estimates that the average rate served on euro funds, for 2022, could be in a range between 1.6% and 2%, or even more than 2% on contracts headlights.

“Insurers will not be able to take the risk of offering too low a rate on the euro fund to avoid excessive outflows at the beginning of next year when rates for 2022 are announced”judges the consultant.

This risk is currently taken seriously by insurers without worrying them. But the sudden bouts of fever on interest rates at the end of August show how fluid and potentially explosive the situation is. “The rise in rates is good news, but within a certain limit. Beyond that, the situation can become complicated »explains Cyrille Chartier-Kastler.

Dip into reserves

To cushion the shock, insurers will always be able to draw on their reserves, in particular the provision for profit-sharing (PPB), whose function is to smooth the performance of funds in euros over time. The amount of the PPB is around 85 billion euros, or about 5% of outstandings, but not all insurers have contributed to this provision in the same way. If the bank insurers are generally well endowed – at the sacrifice of the rates served in recent years – others have preferred to redistribute more widely to the insured to compensate for the drop in rates. This is particularly the case of the Afer contract, managed by Abeille Vie, and distributed by the powerful association of the same name, with rates traditionally at the top of the market range.

Still, life insurance is an ocean liner, full of “sleeping” savers, especially the oldest or most modest customers, who move very slowly. Only the most wealthy customers would be likely to make massive arbitrages to the detriment of the euro fund. However, this wealthy clientele now represents 70% of life insurance collections, according to Facts & Figures. Clearly, modest customers, the middle class or retirees, traditionally invested in the euro fund, are already turning away from life insurance.