Life insurance is now in a situation that can be described as critical. Falling yields, liquidity problems, reduced freedom, or even reduced guarantees… These are all points that threaten this favourite investment of the French. Focus on the subject…
Rates that are at their lowest
The year 2016 shows particularly low returns for life insurance. According to data released by the insurance strategy and management consulting firm, Facts & Figures, the average rate is only 1.95% for this year. This is a very low return which, net of expenses, will still be subject to social security contributions. And yet it would still be “too high to make a risk-free investment“.
According to the firm, it is the inertia of the return on euro funds that would be dangerous. However, French savers still continue to rely on this investment, simply to access “security”. Their capital in euros is indeed guaranteed, but what they are not necessarily aware of is that this guarantee remains relative. It does not concern the actual yield, but only the facial yield. And this, with other points to consider such as costs. For euro funds, the latter amount to about 0.6%. And even if they were at zero, a rate of return of less than 0.6% would yield virtually no benefits.
Moreover, it is perfectly possible to reach a negative threshold. Especially since Brexit, the OAT rate has fallen to 0.23%. This is further proof that life insurance risks are indeed tangible.
An architecture that is now closed
Another threat to life insurance is the new European regulations. With effect from 1 January 2017, these regulations cover the disclosure documents to be provided in connection with investment products, known as Packaged retail and insurance-based investment products or PRIIPS. More detailed than the DICI or Key Investor Information Document, the PRIIPS will require a complete document on all CUs before the insurance contract is taken out.
It will then contain all the detailed points such as the different types of scenarios (negative and positive), the credit risks for the insurer, or the calculation of other risks such as the UC risk. The President of Expert & Finance, Sonia Fendler, says that some contracts, the document to be provided can exceed 1,500 pages. Results: the insured will not be able to find his way around and, at the same time, the management costs will automatically be increased. This new regulation also impacts the open architecture of multi-media contracts. The various possibilities such as SCI, SCPI, sicav… are automatically more limited.
In addition to this weakening of yields and this new regulation, there is also a serious concern about liquidity. The current economic and financial situation remains unstable and, on 13 June, the HCSF or High Financial Stability Board called for caution in a statement. He argued that the downward revision of life insurance returns in 2015 is not yet sufficient, and that these rates still need to be adjusted in line with the current financial situation.
If rates rise, insurers may find themselves in difficult situations, particularly because of the significant inertia of euro funds. Some companies will not be able to offer attractive rates to their customers, who will automatically switch to other, more beneficial solutions. However, it should be noted that liquidity is one of the main assets of life insurance.