Rising interest rates are shuffling the life insurance cards

As announced since the end of 2021, market rates have started to rise again this year. While this situation offers many opportunities for savers and investors, it puts insurers and trustees in a difficult position. In any case, this reversal gives new impetus to life contracts.

Banks and insurance companies have been asking themselves the same question for months: should the remuneration of their life contract, especially the fund in euros, be increased to secure capital and retain savers? Institutions respond differently to this dilemma. Some choose caution, preferring to sell low-paying securities as they mature. Others are tempted to dip into their profit-sharing reserves to boost the returns of their Euro fund. In both cases, a strengthening of the Eurofunds’ performance is almost inevitable in the coming months.

Using reserves to increase yield

For more than ten years, the managers oflife insurance set aside part of the profit on euro funds as profit-sharing provisions. These reserves are created to deal with regulatory constraints and financial uncertainties. A rapid increase in interest rates is one of the reasons that can justify the use of this safety buffer.

These provisions are used precisely to guarantee a satisfactory return on life insurance on the savers’ investment for a long period. However, not all insurance companies are in the same boat.

ImportantAccording to the general manager of Société Générale Assurances, the companies that have built up the most reserves have more leeway.

These companies could raise the yield of their Euro funds to a level close to 2% of Livret A.

For the other companies, the mission looks set to become complicated. Actually approx 10% of the money invested in a Euro fund is invested in the financial markets. However, European and global finance has experienced a difficult period since the beginning of the year. The Paris index has thus lost 19% of its value since the beginning of the year. With such a result, it will be difficult to achieve a satisfactory performance to improve the fund’s return in euros.

Reinvest in more profitable bonds

On the other hand, experts expect insurance companies to do so give a positive signal about their Euro funds. It must be recognized that in the past two years the managers have tightened the conditions for access to these assets and prefer to steer their clients towards unit-linked entities. The situation has not changed, even since the rate hike. These restrictions become problematic because they deprive insurance companies of a large amount of new money that they can invest elsewhere. Because of these blocks, institutions record more withdrawals than investments from their Euro funds.

Without going so far as to remove this barrier, some insurance companies have begun to sell low-interest bonds – even if they have not yet expired – to replace them with more efficient securities. However, most companies prefer to renew their portfolio at a normal pace: one sixth and one tenth of the bonds are reinvested in the market each year. The impact of these renewals will be gradual. In any case, analysts believe we will have to wait until February-March 2023 to better understand the strategies each insurer is implementing.