Life insurance and funds in euros: why the rise in rates worries insurers?


Classic euro funds offer savers guaranteed capital and liquidity of savings at all times. (Photo credit: 123RF)

If it persists, the rapid rise in interest rates could impact the ability of certain life insurance companies to ensure the liquidity of their funds in euros. Explanations.

Why is the rise in interest rates affecting funds in euros?

Classic euro funds offer savers guaranteed capital and liquidity of savings at all times. It is for this reason that they are essentially composed of bonds (about 80%), low-risk and liquid assets, the rest being divided between equities and real estate.

Over the past ten years, bond yields have continued to decline: for example, the 10-year French government borrowing rate (10-year OAT) fell from 3% in 2010 to -0, 15% in 2020.

The companies therefore placed the flows of savings invested in funds in euros by savers in bonds whose yields continued to fall, thus pulling the return on funds in euros down (1.30% on average in 2021 according to the ACPR) and weakening the solvency of life insurance companies (i.e. their ability to guarantee capital).

However, with the surge in inflation in recent months (5.2% over the last 12 months according to INSEE), interest rates have also experienced a sharp rise: the 10-year OAT reached 2, 22% on 06/16.

The Livret A rate, which is set according to a calculation formula that depends on the rate of inflation, should soon be revised upwards. Savers could be tempted to switch funds in euros to passbooks. If this were the case, insurers could then be forced to liquidate low-yielding bonds and record losses. Indeed, with the rise in rates, these bonds are worth less. Some companies could therefore find themselves in difficulty if the rates rise again rapidly and remain at this level for a long period of time.

What are the remedies ?

In the event of excessive difficulty, as a last resort and if the situation so requires, the Sapin 2 law authorizes the HCSF (Haut Comité de Sécurité Financière) to impose certain measures on life insurance companies in difficulty. For example, the HCSF could decide to limit the possibility for savers to make payments on the funds in euros of their contract, suspend or restrict the possibility of withdrawing their savings or even limit the distribution of dividends.

For now, and although the situation may change quickly, there does not seem to be any reason to worry. First of all, insurers have regularly built up reserves. Every year they can reserve part of the income generated by their fund in euros. This reserve, called PPB (provision for profit-sharing) or PPE (provision for profit-sharing) belongs to savers and must be redistributed to them within a maximum of 8 years. In addition, some insurers took advantage of financial market peaks to realize unrealized capital gains on equities and real estate.

In addition, other insurers are beginning to offer funds in euros with a partial capital guarantee or even euro-growth funds.

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