in 2021, the rates served on euro funds are resisting

The publication, at the start of the year, of the rates paid on funds in euros (profit sharing rate, in insurer jargon) is always a privileged moment of communication for life insurers. “Those who communicate first are usually the most generous”, laughs one of them.

But, traditionally, the high point of this commercial communication is the announcement of the rate proposed for the previous year by AFER, this savings association which brings together 753,000 members for 56 billion euros in outstandings. (of which 14 billion in units of account). It is a sort of market “reference” rate on which the competition is more or less positioned.

And it is with a certain sense of decorum that AFER unveiled its general fund rate this Thursday, i.e. 1.7% for 2021. Neither more nor less than that proposed last year. However, the association specifies, for once, that it has significantly increased its allocation to the provision for profit-sharing (which allows the performance of the euro fund to be smoothed over time and which is included in the calculation of the prudential solvency ratio), at 132 million euros, i.e. a stock of 400 million euros at the end of 2021 (i.e. 0.93% of mathematical reserves, which remains three times lower than the market average).

Stability in 2021

This significant endowment is undoubtedly the first tangible sign of the takeover, last June, of AFER’s historic partner, Aviva France, by the mutualist group Aéma. “It was not an easy thing to obtain this rate”, slips besides Gérard Bekerman, president of the AFER, whose reputation of rough negotiator is not any more to make. Coincidence or not, the maintenance of the Afer 2021 rate at the same level as last year is a good illustration of the market average this year.

“My feeling, based on the rates published to date, is that the decline will probably be less than anticipated. We should even see some stability”, believes Cyrille Chartier-Kastler, director of Facts & Figures, a firm specializing in the analysis of the insurance market.

Last May, Facts & Figures predicted an average rate net of expenses of 0.9% compared to 1.08% in 2020 (individual contracts, excluding pensions). Gold, “this average rate should instead be around 1%, despite the continued decline in the return on general assets”, says the expert.

Several reasons can explain this (relative) resistance of the remuneration of euro funds. Insurance companies are first anticipating a gradual rise in long rates (which is not easy in the euro zone, even if the German 10-year benchmark rate briefly moved into positive territory). Then, some insurers no longer want to top up their provision for profit sharing (PBB) too much. Moreover, the communication of this provision is singularly more discreet this year.

Negative return on the euro fund

Finally, insurers have paradoxically wanted to reward their customers who have accepted in recent years, and particularly in 2021, to invest in units of account rather than in the euro fund, which is more capital intensive. Last year, units of account indeed drained some 50 billion euros out of a gross inflow of 150 billion euros from life insurance.

The inflation effect can also come into play. For the first time in a long time, the return net of inflation and withdrawals from euro funds will be clearly negative, while inflation could reach 2.8% in 2021. This is a warning signal for savers who remain attached to the fund in euros, whose capital remains, more or less, guaranteed.

However, the first announcements do not sound like a halt to the decline in the return on funds in euros, which has been going on for twenty years. Some euro funds are still falling, such as that of the Gaipare association, with a rate of 1.8% against 1.9% a year earlier.

The surprise of MASCF

Mutualists have also opted for a reduction, such as La France Mutualiste, GMF Vie or Carac, reports Facts & Figures. Even Mutavie, of the Macif group (Aéma) reduced its rates by ten basis points on its various contracts. Others show stable returns from one year to the next, such as Sogecap (from 0.75% to 1.15%) or Primonial (from 1 to 2.1%, but on a more wealthy clientele).

Others have opted for a rate hike, such as Primonial (on certain contracts), Sogecap as well, but also SMA. It was no doubt MASCF that created the surprise with a 55 basis point increase in its rate applied to general assets, taking into account, “market performance and our dynamic financial management”, explains the insurer.

A singularity which also questions the profession on the meaning of the message that MASCF wishes to deliver by encouraging its policyholders to invest in the euro fund. “Bank insurers should stabilize their rates when they usually serve rates in the lower market average, unlike mutuals”, notes Cyrille Chartier-Kastler.

The long term life insurance

The equation for life insurers could be more complicated in 2022: the rise in rates could create expectations on the part of policyholders in the face of returns that have become negative and unit-linked units will eventually come up against a slowdown in the markets. Especially since history repeats itself, policyholders always tend to increase their unit-linked share at the top of the markets.

Could the rise anticipated by insurers in long rates over the next three or four years change the situation for euro funds? Not really, insist insurers.

“The impact of a rise in rates will necessarily be deferred over time for the insured. The rate paid is not only a function of the evolution of rates but also of the duration of the portfolio, which does not vary enormously over time. The return on the asset is therefore based on stocks from yesterday or the day before. The only adjustment variable could be the provision for profit sharing (PPB) which can better support a rise in rates before its effective effect on the return on general assets”, explains Guillaume Pierron, deputy general manager of individual life insurance at Groupama Gan Vie.

“Insurers who are raising their interest rates today are making a mistake because in any case the return will always be negative and the rise in rates, especially its magnitude, remains a crucial issue for insurers. The latter would have every interest in continuing to strengthen their PPB, either to be able to absorb a too rapid rise in rates, or to further diversify their general assets to boost the yield”, esteems for his part Cyrille Chartier-Kastler.

Communicate differently

Admittedly, a (gradual) rise in long rates is rather good news for insurers because it strengthens their solvency. Prudential models are indeed very sensitive to changes in interest rates. The sudden drop in rates during the summer of 2019 had also caused real stress and put, for a time, some insurers on the verge of insolvency.

On the other hand, a rise in interest rates relieves capital requirements, even if unrealized capital gains on bonds will reduce. What then consider a diversification of the general asset towards shares, real estate, or even private equity. Even AFER, which is very conservative in its management, plans to beef up its equity pocket!

Still, this communication on euro fund rates is probably living its last hours. Many insurers are wondering about the relevance of this focus on the fund in euros while the units of account are gaining in importance, as well as delegated management.

“We are indeed reflecting on the interest of communicating on the rate of profit-sharing on the fund in euros while the proportion of units of account in the contracts has become significant. What counts now more and more is the overall performance of the contract because it corresponds more to what is offered to policyholders. This is what we intend to do in the future. Today, 80% of our new clients are in fact under delegated management, according to ten risk profiles”, says Guillaume Pierron.

Life insurance is changing in nature, communication too. The great annual mass of the AFER on its rate will undoubtedly have to follow the movement.