Life insurance in the low interest rate environment


A life insurance contract is often perceived as a transmission toolof capital (life insurance in the event of death), but it is also a true savings tool (life insurance in the event of life).

A life insurance policy allows you to constitute or make a capital grow. It is possible to subscribe one or more life insurance contracts. Beyond the initial investment, it is possible to make regular or non-regular payments with no limit on the amount. Also, even if it is more interesting from a tax point of view to save for at least eight years, the subscriber can recover his capital at any time.

In France, life insurance is the cornerstone of the financial system. French savers who have feared risk since birth are rushing to life insurance policies, which are considered very secure. The State, for its part, uses this money to finance its budget deficit.

The current situation is characterized by extremely low rates in low-risk markets. This situation penalises the returns of euro funds and jeopardises the capital guarantee.

The statistics of the life insurance market are not lacking. In 2016, no less than 135 billion euros were paid on contracts, and another 48.6 billion euros were paid on contracts during the first four months of 2016 (compared to 47.3 billion euros during the same period in 2015). The stock of savings managed under this investment exceeded €1,600 billion, according to the latest data from the Autorité de contrôle prudentiel et de résolution (ACPR).

This trend is therefore reflected in the average yield estimated by the French Insurance Federation (FFA). The erosion of yields has therefore clearly increased, after years of steady decline: 3% in 2011, 2.90% in 2012, and 2.80% in 2013, 2.50% in 2014, and therefore 2.30% and 1.80% in 2015 and 2016.

The yield on life insurance contracts and funds in euros continues to suffer from the fall in rates. Euro funds, which are found in life insurance, cushion this decline in rates a little because they have stocks of bonds that are at higher rates.

The decline in the return on euro funds accelerated in 2016. The average rate was around 1.8%, a decline of almost 0.5 percentage points compared to 2016, compared to the limited 0.2 percentage point average rates in 2015 and 2014. Even if this rate remains higher than inflation, it is advisable to take more risks, by diversifying the bet on units of account.

The purchase of a life insurance policy has long been, if you choose it carefully, the guarantee of a safe, high-yield investment. This is now less the case.

In 2017, the drop in yields (many contracts fell below the symbolic 2% mark) and some doubts about liquidity forced the investor to broaden the field of vision to new categories of contracts. Some euro funds, with guaranteed capital, still offer a rate of more than 3%. Diversification towards unit-linked products – although not guaranteed – is not necessarily a high risk. Especially when it is carried out in a long-term perspective.
The sector is now in a particularly uncomfortable situation. While euro funds are primarily composed of bonds, insurers must now replace maturing coupons with new securities that yield virtually nothing. Low rates overwhelm companies’ margins, while at the same time increasing the cost of guarantees.

The problem for life insurers is that they rely mainly on investment income to generate results. Low rates make the equation more difficult to solve. And even more so when life insurance flows are still mainly directed towards euro funds. Insurers will become increasingly dependent on their ability to sell products that are less sensitive to interest rates, such as units of account, health or protection products.

Finally, insurers’ reserves are significant, and the possibility of implementing a freeze of funds seems highly unlikely at this time. Benefiting from a tax regime that is still very attractive, life insurance remains a good investment.

References All about my finances Bank


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