Life insurance: are insurers’ reserves sufficient to cope with the rise in rates?

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With the rise in interest rates, life insurance companies have an interest in maintaining a rate of return for their funds in euros that is sufficiently attractive compared to that of other risk-free assets. For this, they will most likely have to tap into their reserves.

How does the rise in interest rates impact life insurance funds in euros?

Funds in euros are mainly composed of bonds (around 80%). With the decline in interest rates over the past 10 years, insurers have bought bonds whose yields have continued to decline.

But following the sharp rise in inflation in recent months, yields on newly issued bonds have risen.

However, the bonds that make up the funds in euros often have long-term maturities, and this puts insurers in difficulty:

– If they decide to sell their bonds before their term to buy new ones (more profitable), they will make a loss because they have lost value

– If they decide to keep them, the rate served by their fund in euros will not be able to rise as quickly as that of other risk-free assets such as the Livret A, for example, whose rate has just risen to 2%. Savers could then arbitrate their savings from the fund in euros to passbooks, withdrawals which would force insurers to sell their bonds and record capital losses.

Life insurance companies therefore have an interest in maintaining a sufficiently attractive rate of return for their euro funds compared to that of other risk-free assets. For this, they will most likely have to tap into their reserves.

Read also: ECB rate hike: what consequences for life insurance?

Insurers have banked the equivalent of 5.4% return

Euro funds are made up of bonds, stocks and real estate. They bring in interest called profits every year. Insurers are required to return at least 85% of these profits to policyholders. To do this, they have two options:

– Paying profits to policyholders immediately after the end of the financial year: this is called profit sharing (PB).

– Put the profits in reserve to distribute them later: this is called the PPB (provision for profit sharing). This reserve belongs collectively to the policyholders and the insurer has a period of 8 years to redistribute it to them.

Thus, the PPB serves as an adjustment variable for the rate of return of funds in euros. It can be used to boost the rate, smooth out the remuneration paid to policyholders over time, absorb shocks on the financial markets or even deal with a gradual rise in interest rates.

According to the ACPR report*, in 2021 it appears that “as in previous years, insurers did not immediately distribute the entire profit-sharing to policyholders and used the remaining amount to fund the profit-sharing provision to profits (PPB). The level of this provision has thus increased for the 10th consecutive year. It stood at 5.4% of life insurance provisions (compared to 5.1% in 2020 and 4.7% in 2019).

On average, insurers have therefore set aside the equivalent of 5.4% return. This should enable them to cope with a gradual rise in interest rates.

What would happen if the reserves of the insurers turned out to be insufficient?

If the level of reserves built up by insurers proves insufficient to cope with too sharp a rise in interest rates, the HCSF (Haut Comité de Sécurité Financière) could activate the Sapin 2 law. This law authorizes the body to impose measures for life insurance companies in difficulty, such as, for example, suspending or restricting the possibility of withdrawing savings.

* ACPR report – “2021 revaluation of life insurance and capitalization contracts – commitments mainly involving savings and individual pensions”


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