Life insurance: how insurers recover their health on your back

Life insurance: how insurers recover their health on your back

This week Macif and AG2R La Mondiale were the first insurance companies to announce the rate of return of their flagship contracts in euros for 2016. The announcements of other insurers will follow until February, but this year, unsurprisingly, their rate should fall sharply. Like the rates announced by Macif: between 1.2 and 1.8%. And by AG2R La Mondiale: 1.75 and 2.1%.

All experts agree that this year, the market average should fall below the symbolic 2% mark. That is less than 1.7% after withdrawing social security contributions. With inflation close to 0.50% in 2016, the real return of a life insurance policy in 2016 is close to … 1%! Not necessarily the ideal to grow his pelota pending retirement … Especially in 2015, it should be recalled, the average yield of funds in euros was still 2.27%. And that it reached even 2.54% in 2014. How such a tumble was made possible?

“When the wise man shows the moon, the madman looks at his finger,” says a Chinese proverb. The finger in this case is the interest rate on the 10-year government bond, which serves as a benchmark in the market. For insurers, the thing is sure: it is the fall in interest rates on the financial markets that is the cause of the decline in the yield of their contracts. This is reflected in AG2R La Mondiale’s explanations for the low interest rates on its contracts: “In 2016, the financial markets showed a high level of volatility and yields on bond investments dropped sharply, as did the drop in yield of 0.40% annual average of 10-year French government bonds “.

The problem is that insurers play with words and make us believe that the interest rate (“the finger”) is responsible for the return on the assets they manage (“the moon”). Nothing is more wrong. In fact, an insurer redistributes the return it obtains from the management of a portfolio of securities, generally made up of 90% bonds (mostly state), shares and sometimes a little real estate. This portfolio is built up as the insured entrust their savings. It therefore contains old titles, serving a very high rate. Only the last subscriptions are in unfavorable conditions, at current rates.

Opaque calculations of rates of return

However, these subscriptions – according to the federation of insurers itself – are at a standstill … In reality, the only indicator of the profitability of an insurer’s portfolio is the rate of return of what is generally called “the general asset “and which is a sort of common pot of what the company manages … Every year, any insured receives from his company two figures: the rate of return of his contract and that of the general assets of which it is extracted. The two figures are generally quite different: for example, 2.2% for the first and 3.5% for the second. It is on this difference that the company will collect its expenses, build up reserves and … count down its profits!

Now, what do we see? That the profitability of the general assets of companies falls much less quickly than the profitability of its contracts. The companies are of course very discreet about it, but several documents emanating from the ACPR, the Prudential Supervision and Resolution Authority, supervision of the insurers, confirm the phenomenon over several years. On the basis of the contracts managed by 12 large companies, the return on general assets decreased by 3 cents between 2014 and 2015 (-0.03 points), while the contract rate fell by 15 cents ( or -0.15 point, to 2.82%).

Between 2013 and 2014, the same phenomenon: a decrease of 23 cents of the rate of the contracts and only 16 hundredths of the rate of the general assets. These gains, which insurers keep under foot, fuel the “reserves” of companies. They must be used to “absorb shocks” as underlined Cyrille Chartier-Kastler, founder of the consulting firm Facts & Figures. The insurer’s only obligation is to redistribute this reserve within 8 years. But not necessarily to the insured on the savings from which he took them!

However, the weight of these reserves in the outstanding amounts of insurers has been steadily increasing since 2011: they represented 1.3% of assets under management in 2011, but exceeded 2.2% at the end of 2015. Thus, CNP assurances, which manages the Caisse’s contracts savings has seen these reserves pass from 1.59% to 3%, Cardif, insurer of BNP Paribas, from 1.54% to 3.27%, the palm goes back to MMA, passed from 0.85% to 3, 85%!

Added to this are unrealized gains (or losses) on the portfolio. If they are weak, the company will be encouraged to moderate the level of the rate paid to the insured. But that the 16 million contract holders are reassured: the capital gains are also sharply higher, as confirmed by a recent document from the ACPR. These small calculations explain that in total, between 2006 and 2015, the contract rate fell by more than 1.6 points while that of general assets lost only 1.25 points! The assertion of insurers that they lower the rates of their contracts to offset the decline in interest rates is false!

Where are the reserves?

But where do these provisions and these latent capital gains land? In the pockets of the insured, you say, because after all, it is their savings that generated these undistributed earnings. Not at all! They go straight into the pockets of the company, which makes it practically what it wants. It can use it to strengthen its own funds or to promote a new product. And yes! An insurer is perfectly entitled to take the gains made with your money to give them to your neighbor! Unfair? Without a doubt. But legal. And this injustice will increase again in the coming months. This has been decided by lawmakers and sector regulators who believe that insurers are still too generous with their customers!

The ACPR, through its vice-president, Bernard Delas has warned its administrators insurers: “it is not reasonable to let savers think that they can sustainably benefit from both the guarantee of capital invested and with a remuneration exceeding the level of inflation by 2 to 3 points, moderation in the rate of revaluation of life insurance contracts is imperative. ” The idea, of course, is to guide the saver, thanks to this perfectly orchestrated fall in yields, towards less restrictive funds for the insurer, such as equity funds.

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