Life insurers face the dilemma of rising rates

After years of stabilization, interest rates have started to rise again since the beginning of the year. Life insurers are closely monitoring the situation, which could affect the liquidity of their euro funds and lead to massive outflows. Faced with this eventuality, they are cautious and adapt their communication with customers.

As announced by economists in the autumn, inflation has been accelerating in Europe and around the world since January. Over the last twelve months, prices have increased by 5.2%. This increase does not only weigh directly on the purchasing power of consumers. It also affects interest rates.

The borrowing rate of the 10-year French Bond thus fell to 2.20% in mid-June 2022, after having fallen to -0.15% at the end of 2020. Advantageous in the long term, this trend reversal exposes life insurers to disinterested savers, who would be tempted to reinvest their money in more profitable vehicles.

Cautious insurers despite contained redemptions

With the rise in interest rates, savers logically expect a revaluation of the life insurance rate by their insurer. It would be misunderstanding how euro funds and multi-support contracts work in general.

Insurers cannot immediately pass on high market rates to the remuneration of their commitments, since the capital committed to these funds has been invested in older, lower-yielding bonds . On this point, life insurance does not work like the booklet A and other regulated booklets, whose remuneration evolves according to inflation. This difference rightly worries insurers:

ImportantAnalysts fear that savers will massively buy back their life insurance in euros, then reinvest in booklets that become more attractive with high inflation.

In reality, this threat has not yet materialized. Life insurance surrenders amounted to 68.1 billion euros last year, a figure slightly below the average observed between 2011 and 2019. Although outflows are expected to increase this year, analysts believe that the communication efforts undertaken since the beginning of the year and redemption penalties will encourage savers to think twice before settling their contract. Insurers remain cautious despite everything. According to the latest stress test carried out by EIOPA, the massive outflows would cause a liquidity shortage for them. They would be forced to sell liquid assets to cover themselves.

Take advantage of the opportunities offered by the rise in interest rates

Despite their legitimate concerns, insurers also see rising interest rates as a source of attractive opportunities. Admittedly, this rise leads to a depreciation of the assets held by the companies. The decrease in value is nevertheless compensated by the decrease in compulsory technical provisions.

ImportantInsurers then find themselves with a surplus balance between assets and liabilities – and this improves their solvency ratio and their available capital.

Companies have resumed buying 3% government bonds with relatively short maturities. This strategy allows them to maintain a negative duration gap. The latest EIOPA study on the subject shows that the duration of assets controlled by insurers is 6.3 years, compared to 11.8 years for liabilities. For life insurers, the current period is conducive to the purchase of better-paid bonds.

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