Impact of new ECB rates on life insurance will be limited - August 2022 - News - Life Insurance - Meilleurtaux Placement

Impact of new ECB rates on life insurance will be limited – August 2022 – News – Life Insurance – Meilleurtaux Placement

Over the past six months, government bond prices have risen, after several years of stagnation or decline. This trend reversal, along with accelerating inflation, points to an increase in the ECB’s key interest rates, which the European Bank did on July 21. This change will not be without consequences for life insurance.

Insurers and banks have been asking the same question for a few weeks: What would happen to euro-denominated funds if government borrowing rates rose sharply in a short period? All analysts wanted to solve this puzzle and some even came up with the most alarming predictions. Experts in particular fear a wave of massive withdrawals of investments, which could affect the liquidity reserves and solvency of insurance companies. Others want to be reassured and draw attention to:

  • Corporate financial strength.
  • State safety nets.

Gradual improvement in bonuses for contracts in EUR

Higher ECB policy rates have a direct impact on the cost of credit for businesses, individuals… and the state. However, 80% of the assets in Euro life insurance funds consist of corporate and government bonds. In theory, the reward on these contracts should increase in the coming months. The reality is a little more complicated. Loans held by insurance companies were obtained at a time when rates were still very low, about 0.5%. In the near future, distributors These new rates cannot be passed for the performance of their Euro contracts.

This action will be possible only when their portfolio welcomes new, more profitable bonds. In other words, The yield on euro contracts will change more slowly than bond prices. This delay leads logically The unattractiveness of euro contracts, at least temporarily. Savers can decide to withdraw money from their euro money and reinvest it in a premium brochure or structured product like Livret A, for example. After all, these compounds offer a rate of 2% as of August 1, which is much better than the average return of 1.3% on the euro commitment.

If this arbitrage occurs, insurance companies will be forced to liquidate their stock of old bonds and record one or more significant capital losses. However, even at this point, the risk of insurance companies collapsing is limited. The Supreme Committee for Financial Security can activate Sabine Law 2, A special device that makes it possible to limit the withdrawals of savings and dividends when such operations pose an existential threat to banks and insurance companies.

More price increases are expected this year

Despite its impact on savings products and financial markets, the increase in the ECB’s key rate is well received by insurers and governments. The Observers hope that this decision will slow inflation in Europe The faster the better. The European Central Bank aims to keep consumer price inflation below 2% in 2023. This target will be difficult to achieve.

Brussels expects an inflation rate of 4% next year. This is well below the 8.6% rate measured in June. However, this value still exceeds the 2% cap associated with “controlled” inflation, in the words of the European Central Bank. To reach this level, Further price increases may be considered. This action can lead to the use of the IPT software. This emergency mechanism allows the European Central Bank to buy the debt of European countries that are most difficult to face with high borrowing rates.

Leave a Comment

Your email address will not be published. Required fields are marked *