Growth of the life insurance market and return on funds in €– Get a quote online

IV. The growth of the life insurance market
The year 2009 was an exceptional vintage marked by an increase in gross collection of 13% (22) compared to the previous year, the slowdown observed in 2010 is logical (4% increase) because the base effect is unfavorable, but the market remained on high bases.
In 2011, the growth in inflows will be marked by a marked slowdown compared to previous years, due to the continued fall in yields on contracts in € uros becoming less attractive from the rise in rates on regulated savings ( livret A rate increased to 2% since February 1, 2011).

(20) Return On Equity (ROE) is the term that measures the percentage of net income that goes to shareholders. Thus, it indicates the profitability of the company and its ability to generate profit.
(21) “Embedded Value” has been a concept that has been used for several years by Anglo-Saxon financial analysts in the insurance sector. It makes it possible to assess the present value of the contracts in the portfolio of an insurance company and completes the annual photograph constituted by the analysis of the result and the return on equity.
(22) Source FFSA

Life insurance policyholders once again confirmed in 2010 their attachment to security products. Support in € uros is still preferred by savers with € 125 billion invested in 2010, i.e. 87% of collection (23).
Several experts indicate that by 2020, the life insurance market will remain buoyant with an average growth rate of between 4% and 6%, due to the maintenance of a high level of precautionary savings and needs. increasing retirement savings.
This low growth and costly in equity for life insurers necessarily requires finding new levers of growth whose economic model will have to evolve.
V. The return on funds in € uros
The return on funds denominated in € uros continued in 2010, a decline that had started many years ago, falling to an all-time low. The range of returns ultimately served by insurers has widened further to the benefit of the most recent contracts and, often, to the detriment of the oldest ones, especially since we witnessed in 2009 a flowering of promotional offers which triggered the intervention of the supervisory authorities to avoid excessive distortions of remuneration.
1. The current situation
Basically, the continued decline in returns on funds in € uros should come as no surprise: except for very brief periods, it has been more than seven years since euro area government bonds, which constitute the essential share of funds. in € uros, yield less than the latter. With inertia and delay, thanks to high-rate loans taken out before the 2000s but whose portfolio weighting is now becoming low, the rates of return served therefore only adjust to financial market data. Between 2.8% and 4.25%, or even slightly more, the spectrum of returns was particularly wide. Beyond the discretionary commercial policies of insurers, the reason also lies in the very large movements that have shaken the financial markets, including the interest rate markets.
A generalized fall in rates of return, but the magnitude of which varies among life insurance companies. While as we have seen, the performance of funds in € uros is largely linked to the annual yield of long-term bonds, as a general rule, in companies, the rate of return offered by an insurer does not correspond exactly to the performance. of its financial assets.

(23) Source FFSA.

Indeed, the profit-sharing provision is there to allow it to smooth out good and bad years over time. Its importance is however very variable according to the companies. Suddenly, when the return on invested assets is honorable, the insurer can put some in reserve to face the more difficult years. A practice which has been widely used for several years, but reserves are drying up and the returns on funds in € uros are increasingly limited.
Can we talk about the end of the golden age? The end of a very favorable historical cycle?
2. The composition of funds in € uros
To fully understand the operating mechanism, we must look at the composition of funds in € uros. You should know that the fund's portfolio in € uros is never frozen. Daily, insurers buy or sell stocks or bonds in order to secure or get the best profit. So there is no typical composition, that's what makes the difference from one insurance company to another, is the relevance in the choice of assets. In general, a € uros fund is made up of the following ranges:

The composition of funds in € uros

We remind you that funds in euros invest approximately 85% of the savings entrusted to them in bonds, issued by governments or large companies. Said bonds are generally held until maturity by insurers, and their coupons (24) form the fund's income in € uros. They therefore determine the major part of the return served to policyholders. However, for twenty-five years, the interest rates of bonds issued on the market have practically never stopped falling. They amounted to more than 15% at the start of the 1980s and fell to a historic record of 2.46% in August 2010. The managers of funds in € uros therefore had to invest the new sums collected each year in obligations that paid less and less.

(24) Bond coupons: the interest they issue each year

The fluctuations were strongest in corporate bonds. The 2008 financial crisis resulted in severe pressure on yields.
Real estate assets, already quite minor in ordinary times, were generally reduced in a rather gloomy context concerning the real estate of return, namely, the offices and the commercial premises, more or less affected by the weakness of the economy, a increase in the vacancy rate and weigh on rents. A few funds have been able to acquire assets at good prices from cash-strapped players, but overall the sector has not been a positive contributor to performance since 2009.
Finally, equities, after a very difficult start to the year 2009, have since rebounded sharply, but in a very volatile manner. But here again, few funds in € uros have been able to benefit from such a development. Indeed, the fall in equities that occurred in 2008, for both technical and regulatory reasons, prompted insurers to reduce their exposure to this asset class, which is now very low compared to fund assets.
3. The outlook
The prospect of funds in euros darkens in 2010. The level of interest rates has normalized, quality sovereign bonds offer a slightly lower yield compared to 2009, private bonds no longer have a decisive remuneration advantage. Certainly, controversial signatures, whether public (Greece for example) or high yield (number of emerging borrowers, or unrated private) generate a still high yield, but with a risk of payment incident that is hardly compatible. {high dose with the objectives of funds in € uros. Real estate investment does not yet guarantee increased returns in recovering markets. Actions are uncertain, as plans to strengthen the standards imposed on insurers under the Solvency II agreement will make it more expensive to hold them.
In the longer term, some observers are also wondering about the capacity of funds in euros to cope without disturbance to a probable rise in rates on the one hand, which would weigh on the outstanding amount of portfolios, and on capital outflows. more and more numerous on the other hand, for demographic reasons (the drain on life insurance contracts providing additional income to retirees). The requirement for a greater use of own funds, again in the context of Solvency II, in the management of funds in € uros, does not go in the direction of increasing yields either.
The fall in the yields of these funds in 2010 thus seems programmed. Thanks to their variable reserves depending on the company but still not negligible among many of them, insurers should be able to slow down their erosion.
Taking into account the ongoing recovery in inflation after a year in which it was practically absent, the real return on funds in € uros will therefore suffer a marked dip, from 3.50% to 4% at barely half, a real rate, but also facial, which charges quite dearly for security and a guarantee which remain decisive arguments for many savers.
This tightening is likely to continue, causing a real reinvestment problem for insurers and straining future yield capacities.
Read the full brief ==> (Towards the end of euro funds?)
End of studies thesis – CNAM
National Insurance School