Life insurers brace for new cycle of high rates

Life insurers could well do well among the winners of the rate hike. “As an institutional investor, I see the current situation more as an opportunity“, described Jean-Sébastien Lyonnaz, director of assets, treasury and financing of Aesio Mutuelle at Cercles de Agefi in Lyon on June 16. Euro funds, which are made up of almost 80% bonds and which still represent around 80% of the 1.847 billion euros in outstanding life insurance investments at the end of April 2022, can now invest in better-paid bonds. Like the French 10-year OAT, which fell from 0.35% at the start of March 2022 to 2.20% at the end of last week. In 2021, the average return on euro funds reached 1.30%, according to France Assureurs.

“The rise in rates is initially a very positive fact for raising solvency ratios“, abounds Guillaume Pierron, deputy general manager at Groupama Gan Vie. Under the European Solvency 2 directive, which governs the prudential regime for insurers, changes in rates first affect assets by reducing the value of fixed-income investments in the context of a rise in rates, such as bonds. But also the liabilities, largely made up of the insurer’s technical provisions, the value of which, discounted at higher rates, decreases. However, the duration gap is negative for life insurers: in France for example, the average duration of liabilities is 11.8 years compared to 6.3 years for assets, according to a 2019 study by Eiopa.

Redemption risk
and unrealized losses

“For insurers with a negative duration gap, in the event of an increase in interest rates, the reduction in the market value of assets is more than offset by the reduction in technical provisions, which improve the surplus assets versus liabilities, which in turn improves available capital“Judge Natixis analysts in a note. “We have just started buying government bonds on bonds again with the rise in rates. Having 3% on certain European States and on durations that are not necessarily very long, that suits us well», Illustrated in Cercles de Agefi Jérémie Garrot, deputy general manager of L’Auxiliary.

“Be careful, however, that the good news of the consequence of the rise in interest rates on liabilities is not offset by various aspects“, tempers Norbert Gautron, president of Galea. Three elements, linked to competition from more remunerative media such as regulated passbooks, are particularly pointed out: a risk of redemption, a situation in which policyholders would redeem their contract en masse to abandon life insurance, an expectation of revaluation of services by the insured and a risk of arbitration in which the insured would leave on other supports. “The subject worries me“Says the president of Facts & Figures Cyrille Chartier-Kastler who fears the systemic risk linked to latent capital losses on the current bond pocket in the event of a panic buyout. According to the ACPR, these redemptions, which should therefore increase, reached 68.1 billion euros in 2021, i.e. a level “down” and close to the long-term average between 2011 and 2019 (68.6 billion euros).


“What makes customers buy back is not the slightest performance, but the uncertainty about the ability to recover their money. The slightest performance will affect the flows, yes, but not the stock“, wants to believe Guillaume Pierron, recalling the capital guarantee of funds in euros. “In addition, insurers have committed to changing their offer in dimensions that can make it possible to capture the opportunities linked to this rise in rates.», Analyzes the leader. Especially since alternative assets for savers remain unattractive: “Redemption penalties, linked to the taxation of life insurance contracts less than eight years old, deter savers from redeeming their life insurance contracts“, adds the ACPR.

Insurers are playing it safe, however. Natixis analysts recall the result of the latest stress tests conducted by the European authority (Eiopa) under an unfavorable scenario with many takeovers: “liquidity will not be sufficient to offset the massive net outflows“but these exits could”be covered by the sale of liquid assets held by insurers“. On the operational side, they will also have to embark on the challenge of adapting the offer:We must be vigilant in managing our flows and carry out real communication work with customers to direct them to products that make it possible to enhance this rise in rates.», Recognizes Guillaume Pierron, at Groupama.


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