Better interest rates mean better investment options than life policies. As France's exposed lifers watch on, some count up their liquid assets, some count on customer loyalty – but will all ultimately count on CIOs, to sell off GAs? David Walker reports
Every silver lining has its cloud, and for rising interest rates, a significant cumulonimbus now facing life insurers and their chief investment officers is the risk of customers spying better returns available elsewhere – even from banks - and demanding their money back in a hurry.
Deposit accounts rival or surpass what many lifers promise customers - and governments often backstop depositors. It has lifers, including France's, watching carefully, defending their products, and quietly counting their money.
And if liquidity is needed hurriedly? Well, European Insurance and Occupational Pensions Authority data show chief investment officers at France's pure life insurers sat directly on €558bn ($611.9bn) worth of sovereigns and credit by Q3 2022 so they could be summoned to sell - and presumably crystallise some truly gargantuan paper losses.
Two-year deposit rates leaped over the past 12 months from barely 0.5% to exceed 2%, and Moody's analysts Benjamin Serra and Christian Bardoff warned in a report this week with another 100 basis points' rise "banking products could become materially more advantageous in many countries". Europe's banks generally don't trumpet their savings products, yet still, "the situation is, however, much less favourable than one year ago when remuneration of most insurance products was materially higher than that of banking products - competition is therefore increasing".
Lapse risk is low for Europe's life firms overall, but it varies by country and firm, with the most vulnerable insurers being "those focusing on saving products directly competing with other savings providers, with low surrender penalties, distributing through non-proprietary channels, and focusing on wealthy, mass affluent or corporate clients".
Serra and Bardoff analysed lapse risk in nine European countries, finding it generally lower Switzerland, Sweden, Belgium and the Netherlands, it was increasing in Germany and 'moderate' in Norway, while French lifers sat in "one of the most exposed markets...because of competition with regulated banking products, and the absence of surrender penalties".
Moody's did note asset-liability matching in France takes the risk into account and reduces risk of losses, and "deferred profit-sharing also helps". Cut-rate inheritance tax, and income tax benefits for interest from policies over eight years old, mean French customers generally regard their policies as long-term investments.
But Moody's notes guaranteed products are easily surrendered, penalty-free after 10 years, and not permitted to exceed 5% of mathematical provisions before that, and they are "very low in practice".
The policies themselves offer guarantees of less than 0.5%, though lifers bumped crediting rates from 1.3% to 2%, on average, during 2022, and Moody's expects higher this year.
For now, luckily, French banks lag in their own largesse but two-year deposits pay about 2% - "materially higher than the euro area average". Since February Livret A' liquid accounts at banks offer 3% tax-free, and even though French savers can own just one capped at €22,950 Moody's says "we consider the level of competition to be relatively high [and] to reduce insurers' new business volumes".
Nervous times
Lapse risk is a danger the sector is certainly alive to.
GACM ACM Vie explains: "Due to inertia of a portfolio's rate of return, in the event of a rise in rates the rate paid [on euro contracts] may initially be below market rates [which is] all the more important when the rise in rates is marked, and sudden. Policyholders can then decide to buy back their contract to invest their savings in a competing product. These redemptions, if they become significant, may force the insurer to sell its bond securities by realizing capital losses."
At Antarius, the capital charge for life underwriting risk rose in 2022, supplanting the "significant reduction" in its market SCR, mainly because lapse risk rose.
Paying out surrenders represented 74% of the insurer's total insurance services expenses of €1.4bn in 2022. It highlighted having lessened the risk "in a deteriorating economic environment," by having established a reinsurance treaty with Cardif Assurance Vie.
Rival BPCE Life uses repo programmes and intra-group quota sharing with BPCE Vie, to dampen its lapse risk, but it still consumes 54% of life underwriting risk at the undertaking.
"Mass redemption risk may lead BPCE Vie to sell assets at an inopportune moment and thus expose itself to the risk of financial loss. It would also lead to a loss of future margins on the repurchased contracts," the underwriter notes.
Hot to cut and run
SGAM described in its SFCR the latitude afforded customers to get shot of "all or part of their available savings before contract expiry, in most cases at any moment. The surrenders may entail for the insurer divestments of financial investments in unfavourable conditions and cause the insurer to make capital losses if it does not have enough cash to meet its commitment, and thus modify the technical balance and the portfolio, in a significant way".
SGAM was of many French lifers noting its "general liquidity and portfolio diversification of [its] assets would allow, in the event of exceptionally high levels of redemptions, the sale of securities in a considerable and sufficient scale to [cover] exceptional cash outflows, without realizing material losses. SGAM's sensitivity to liquidity risk thus appears to be controlled".
A €10bn fall in the net inflows at SGAM AG2R Mondiale during 2022 was "explained in particular by an increase in redemptions in the 2H [and] is also a consequence of rising interest rates and inflation, as returns on banking products [are] becoming competitive again compared to the returns of euro funds".
Fellow lifer BPCE Vie noted "increased redemptions" from its Euro fund in 2022, but said in its 2022 solvency and financial condition report (SFCR) that "with good liquidity management the situation was brought under control without having recourse to the provision for profit-sharing (PPS), nor recording capital losses".
Other French lifers attested to having sufficient volume of liquid investments, and alternative means at their disposal, including their expected profits in future premiums. They also itemised strategies to deter surrenders, trumpeted having loyal customers, and gave reasons not to leave.
GACM ACM Vie was quick to emphasise its net outflows from euro funds in 2022 was "not due to the redemption rate, which was stable over the year and in the context of sharply rising interest rates and inflation, rates paid on [funds in euros] have been significantly increased compared to 2021, via a limited resumption of the PPS." The lifer may well keep close eye on the level of 'rachat' – it consumes €1.3bn of its €2bn life underwriting capital requirement.
GACM SA trumpeted its 'solidarity mechanism' to "reward 'loyal' customers," its "significant" volume of future bonus reserves/provision for profit sharing, and ability of the HCSF – a government body under the Minstiry of Finance charged with financial stability and macroprudential policies - to temporarily limit redemptions. but the insurer still acknowledged that its redemption risk for euro products remained "significant".
Redemptions worth €1.4bn landed at Mutavie in 2022, representing 6.1% of savings managed at the dawn of 2022, up 14bps year on year, but the mutual said the rate "remains at a relatively low level due to the economic and social context [and] several elements combine to protect the insurer against the risk of mass surrender". It highlighted the loyalty, and 74% satisfaction rate, among its members – only 0.1% of whom complained in 2022. Furthermore, its members plan bequeathing 53% of Mutavie's relevant assets, "and from this perspective life insurance remains a very advantageous tool".
While many lifers highlighted solvency ratios 'surviving' the 40% redemption-risk shock that the standard formula prescribes for individual and collective-beneficiary contracts in the life underwriting risk module, others turned to difficult historical moments for lifers, globally.
Mutuelles le Conservateur (MLC) noted the "preventive introduction of redemption penalties [had] made it possible [for lifers] to avoid massive redemptions" after Japan's Nissan Mutual Life went bust in 1997, and added that during 2008, and 2020 the French firm had not suffered "any lasting or massive increase in redemption requests".
Lapse risk might appear more for the industry with "a change in legislation, particularly concerning taxation of life insurance, making the product significantly less attractive than other savings offers," MLC said in its SFCR.
But it added a large proportion of its own members are over 70, drawing down income regularly for retirement "and on the other hand with the objective of inheritance", making the cohort "structurally resistant to the risk of massive surrenders - which reduces the impact for the insurance company."
The numerous safeguards, deterrents and preparedness for life policy lapse risk might give lifers' CIOs comfort, in France and elsewhere – but interest rates could yet climb...
This feature forms part of Insurance Asset Risk's 'SFCR season'. To read other features in the series, click here to read how the MA has given UK lifers £482bn in capital relief since 2016; click here to read How German lifers' CIOs feel relieved as their ZZRs gave back some money, in 2022; here to read How UK SFCR drafters described last September's 'gilts storm'; and here to read how Lloyd's syndicates' investments turned out in 2022. And here to read how the MA misfired for Spanish users of it, and here to read how Spanish CIOs are welcoming rising rates. And click here to read how equities exposure is still a theme among Scandinavian and Nordic insurers and here to read how Benelux insurers' interest rate capital bills fluctuated, sometimes wildly, in 2022.
