Classic euro funds that provide the guarantee of capital and liquidity of burglaries at all times. (Photo credit: 123RF)
If it persists, the rapid rise in interest rates could impact the ability of some life insurance companies to secure the liquidity of their euro funds. Explanations.
Why is the rise in interest rates impacting the euro fund?
Classic euro funds that provide the guarantee of capital and liquidity of burglaries at all times. It is for this reason that they are mainly made up of bonds (about 80%), low-risk and liquid assets, the rest being divided between shares and real estate.
Over the last ten years, bond yield rates have been steadily declining: for example, the 10-year French government borrowing rate (10-year OAT) has risen from 3% in 2010 to -0, 15% in 2020.
Companies have therefore placed savings invested in euro funds by savers in bonds whose yields have been steadily declining, pulling the return on euro funds downwards (1.30% on average). 2021 according to the ACPR) and weakening the solvency of life insurance companies (i.e. their ability to guarantee capital).
However, with the rise in inflation in recent months (5.2% over the last 12 months according to INSEE), interest rates are also rising sharply: the 10-year OAT has reached 2, 22% on 16/06.
The rate in Booklet A, which is set according to a calculation formula that depends on the rate of inflation, should be revised upwards. Investors may be tempted to arbitrage the fund in euros towards the passbooks. If this were the case, insurers could then be required to pay off low-yield bonds and record losses. Indeed, with the rise in interest rates, these obligations are cheaper. Some companies may thus find it difficult to get fast installation rates and stay at that level for a long time.
What are the possible remedies?
In case of too much difficulty, in the last resort and in the situation of demand, to the Sapin 2 law authorized by HCSF (Haut Comité de Sécurité Financière) to impose certain measures for insurance companies in difficulty. For example, the HCSF may decide to limit the ability to withdraw from savings or limit the distribution of dividends.
For now, although the situation may change rapidly, it does not seem to be a cause for concern. First of all, insurers have regularly set up reserves. All this can be put in reserve for part of the income generated by their funds in euros. This reserve, called PPB (Provision for Profit Sharing) or PPE (Provision for Surplus Sharing) is owned by investors and must be redistributed to them within a maximum of 8 years. In addition, certain insurers benefit from peaks in the financial markets to realize the latent capital gains on shares and real estate.
In addition, other insurers are beginning to offer euro funds with a partial capital guarantee or Euro-growth funds.