Life insurance battered by the sharp rise in interest rates


Is the crisis coming from the United States likely to affect life insurance, the product with nearly 1,900 billion euros in assets in France, of which nearly three quarters are made up of bonds through the funds in euros? These non-risky supports for the saver – the capital being guaranteed by the insurer – are the preferred financial investment of the French.

The decision of the American authorities to close the Silicon Valley Bank (SVB) after a bank panic is a reminder, however, that risk is not absent from this universe. To meet its customers’ demand for liquidity, the bank had to sell the government bonds it held, even though their value had fallen due to the sharp rise in interest rates.

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These old bonds were issued with a promise of low or even negative yield, while bonds issued today are issued with much higher yields. However, when rates rise, operators buy new, more profitable securities and can sell those they own, which then lowers prices.

Since the beginning of 2022, the rise in rates, a consequence of the tightening of monetary policy by central banks, has been brutal. The 10-year OAT (bonds assimilated by the French Treasury over ten years) gained three points in one year, going from almost zero at the end of 2021 to 3.14% on March 9. For corporate bonds too, “the gap is wide between, for example, securities which posted a yield of 0.8% in 2021 and securities currently issued at 4.50%”notes Cyrille Chartier-Kastler, from the consulting firm Facts & Figures.

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“As a result, the old titles are no longer popular at all”, explains Jézabel Couppey-Soubeyran, lecturer in economics at the University of Paris-I. When it is necessary to resell them, it is necessarily at a loss.

If the bonds are not sold before maturity, often seven to eight years for the insurers, the holders lose nothing: the issuer, barring bankruptcy, repays the capital. “So the solution is to wait”explains Couppey-Soubeyran. SVB had no choice, they needed cash, but “an insurer is in a better position than a bank, it is less exposed to a sudden withdrawal of funds from its customers, and therefore to the risk of having to sell old bonds before maturity”. The situation could change if households decide to withdraw money massively, in the event of a financial crisis that strongly affects employment, she continues.

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