Editorial: a turbulent zone for life insurance at the start of 2023?

By Emilien FRANCOISE, founder of Nextbanq.fr

It will have escaped no one that since 2008, the rate of return on funds in euros has been falling year after year with the regularity and precision of a Swiss clock. Indeed, with a global macro-economy mired in lower policy rates, bond yields followed the same trajectory. However, despite a greater share given to equities and real estate, bonds still constitute (and by far) the basis of the remuneration of funds in euros.

Now that inflation impresses with its scale and speed, it is therefore legitimate to ask the question of its impact on life insurance, the preferred tax envelope of the French. For example, the Livret A account doubled its rate on July 1, 2022, from 1% to 2%. After a decade of continuous rate cuts, this leap is surprising!

To the point of undermining the funds in euros? The question is sensitive, because a massive withdrawal of funds by savers would have dramatic consequences on the debt market. However, with a booklet A at 2%, the question of redistributing part of your savings on this booklet is very timely.

Because unlike the Livret A whose remuneration is fixed by the French government (taking into consideration complicated formulas for calculating inflation), the rates of funds in euros do not have the same room for maneuver to adapt their returns. Quite the contrary!

Admittedly, the new bonds issued by the states have higher yields, but for the moment they only concern a marginal part of the managers’ portfolios. In other words, we still have to “wrestle” with all the miniscule yields of the bonds subscribed for a short time ago.

Is life insurance able to adapt quickly? This is a real challenge, because this accelerated rise in rates is neither more nor less than the unfolding of the disaster scenario, anticipated by our politicians with the passage of the Sapin 2 law in 2017.

Yes, you read correctly, the risk of a rise in rates and a subsequent influx of withdrawals is so great that a law has been passed to protect against it, by establishing the blocking of funds for up to 6 months. … So much preparation on the part of the public authorities can leave one wondering!

Are the controversial provisions of the Sapin 2 law likely to be activated soon?

If high inflation continues, it is undeniable that savers will start to question the advisability of remaining invested in euro funds. Because although the relatively “low” ceiling of €22,950 for the Livret A avoids a direct confrontation with life insurance and its absence of a ceiling, it only symbolically prevents the general public from thinking that the funds in Euros are no longer useful. In short, to continue to exist, more than ever, the time has come for a rise in yields!

But as we have seen, inertia is important with stocks of debt whose maturities are still far away…

Fortunately, if the rates of return on funds in euros are not as flexible as those of regulated savings, life insurance companies still have an ace up their sleeves, via their provisions. Indeed, every year, they keep part of the profits to redistribute them within 8 years, with a view to smoothing returns.

However, it happens that these cash reserves are at a very high level… The change of cycle is therefore the ideal moment to use these reserves. Will this be enough?

Undoubtedly, the results season which will take place at the start of 2023 with the performances of 2022 will be a major test. Indeed, if by then the inflationary pressure does not drop a notch, this will be an opportunity for many savers to note for the first time the difference in profitability between funds in euros and the Livret A. With the risks involved…

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