Life insurance is fine. Life insurers too. In the first quarter, net inflows on the preferred savings product of the French even experienced a record for eleven years at 8.4 billion euros, including 2.2 billion euros for the month of March alone, according to the figures from France Insurers. Neither the war in Ukraine, nor inflation, nor even the spectacular rise in interest rates over the past three months have succeeded in deterring the French from life insurance.
The drop in stock market indices, of around 10% since January, has not dampened the enthusiasm for Unit-Linked (UA) within contracts either: net inflows in March on UA thus reached 3 .3 billion euros while the fund in euros (with guaranteed capital) continues its net outflow, to the tune of 1.1 billion over the month.
In total, unit-linked units resisted the high volatility of the markets, and still drained 40% of premiums (gross inflows) from life insurance in the first quarter, once morest 44% on average over the year 2021 and… 15% in 2011. We thus measure the extent of the progress made to convince the French to take a little risk on their life insurance, a support which has built its popularity on its capital guarantee (and its attractive taxation).
Improved solvency ratios
As for the insurers, they breathe. The rise in interest rates, with a ten-year OAT gaining nearly 140 basis points to reach 1.4%, its highest since 2015, is indeed good news that has been awaited for…ten years. “The first, mechanical effect of the rise in rates is an improvement in solvency ratios”, recalls Guillaume Pierron, deputy general manager of individual life insurance at Groupama Gan Vie. In the Solvency 2 prudential approach, the rise in rates both improves the coverage rate, according to the principle of discounting future margins, but above all it rules out the most extreme scenarios, those that cost the most in equity.
The scenario of a rise that is both too rapid and lasting in interest rates might raise two questions for insurers: the impact on the return on the general assets of funds in euros, still 85% invested in bond debt of which the valuation falls in the event of a rise in interest rates, and the behavior of savers.
A matter of attention but not of concern
“The pace of rate increases is a subject of attention, but not of concern at this stage”, advances Franck Le Vallois, managing director of France Assureurs. “It is indeed a very sudden rise in rates that might cause concern. But, over a medium-term horizon, there is no real cause for warning, especially since the amount of unrealized capital gains and the provision for profit-sharing (PPB) represents, at the end of 2021, 21 .7% of mathematical reserves for the whole market. These are significant and sufficient pockets of wealth to cushion even a violent shock to interest rates”says David Dubois, director of partnerships at Prévoir and former president of the Institute of Actuaries.
For now, no one is considering this worst-case scenario and even the 10-year OAT, following its rapid rise, seems to be stabilizing below the 1.4% threshold. The market anticipates 1.5% at the end of the year, and 2 to 2.5% « grand maximum » in 2023, according to one bond manager. “When rates fell to 2.5% ten years ago, everyone was already worried regarding the future of life insurance”laughs an insurer.
“The fear that we might have would be a significant and rapid shift between the return on general assets, which will continue to decrease, and market rates”, recognizes Guillaume Pierron. In 2021, according to the ACPR, the average rate paid to policyholders on a fund in euros was 1.3%.
Strong inertia
But, adds the insurer “I think it’s a fairly theoretical threat. For several reasons: the new players have not been able to really break into the life insurance market, where the barriers to entry are high, and life insurers can draw on their PPBs to cushion the gap years. I also think that the market has reached a bottom in terms of PPB, even if the situations can be very different from one insurer to another”.
While it is always difficult to predict the behavior of savers, one of the strengths of life insurance is its stability over time (except in 2020 during the health crisis). The average duration of a contract is 12 years and life insurance has never really experienced a wave of redemptions, likely to force insurers to realize unrealized capital losses.
Even in the 2000s, competition from “super booklets” did not cause redemptions by simply biting into the collection. In summary, in the event of a sharp rise in interest rates, we should expect more a reallocation of inflows in favor of more banking products than an outflow of capital from life insurance.
“It is not because market rates rise sharply that policyholders will massively decide to leave life insurance or funds in euros. There is a strong inertia for fiscal reasons, of course, but also because this product is not the natural ground for incessant arbitration. This long-term savings effect can offset the medium-term impact of a decline in asset valuations.explains David Dubois.
No impact on business strategies
Still, the new products launched, such as the PER or Eurocroissance, might benefit in the medium term from this breath of fresh air on rates. UCs also represent an alternative, making it possible to seek returns directly on the markets, via bond funds.
In fact, UCs, currently largely invested in equities, offer a new, more flexible framework allowing life insurance to adapt more quickly to market conditions. In addition, there are more and more protection mechanisms on CPUs allowing performance to be crystallized to date to avoid remaining exposed for too long.
However, will the rise in rates signify the strong comeback of the fund in euros? “In the event that the OAT rate is permanently maintained at 2 or 3%, positive net inflows into the fund in euros would no longer be a poison for the insurer. It would somehow become more acceptable. But I don’t expect a change in strategy from insurers, especially those who have invested heavily in recent years to develop UC. There may just be a new balance point between the euro fund and the CUs,” believes Guillaume Pierron.
Life insurers have invested heavily in education and decision support tools in recent years to promote UC to their customers. « It would be a shame to initiate a backward movement following all these educational efforts with the insured. Insurers would have nothing to gain from it, neither will policyholders.adds an insurer.
Mutualists vs capitalists
The commercial policy of life insurers differs significantly from one network to another. Mutuals remain more in favor of funds in euros, deemed to be more protective for policyholders, and are developing unit-linked funds in moderation. “Mutuals are more present on the fund in euros by the importance of their own funds, where the other players are developing new models to optimize their need for own funds”, observes Cyrille Chartier-Kastler, president of the firm Facts & Figures, which has just published a detailed study on the profitability of insurance groups in France. In addition, the life business is largely in the minority among the Niortaise mutuals and targeted at a more working-class clientele.
Listed insurers, such as AXA or Generali, or the insurance subsidiaries of listed banking groups, on the other hand, manage their commercial strategy more precisely according to the constraints of solvency or profitability. This is why AXA in particular promotes the Eurocroissance contract, less greedy in equity, or why Swiss Life left very early on UC, which now represent 60% of contributions, once morest 30% in 2011.
Finally, bank insurers increasingly offer funds in euros with partial guarantees. “The Solvency 2 rules have encouraged capitalist players to divest from long branches in damages but also in life insurance”, remark Cyrille Chartier-Kastler.
