With the rise in interest rates, euro funds are in turmoil. In the event of panic, the Sapin 2 law allows a temporary blocking of funds by the insured. A device that worries in the current context. Explanations.
Bankruptcy of the SVB bank in the United States, takeover of Credit Suisse, Eurovita in Italy placed under the supervision of the State… Several banks and insurance companies have been in turmoil in recent weeks. What is there to worry about backlash in the whole of global finance with a domino effect on your life insurance?
“We cannot speak of an epiphenomenon,” points out Gildas Robert, associate director of actuarial consulting at Optimind, a specialist in life insurance in France. “This topic is shaking global financial markets. So much so that central banks had to intervene. »
“We cannot speak of an epiphenomenon”
The markets have left feathers there, banking stocks such as BNP Paribas and Société Générale experiencing occasional big drops. But the fall actually concerns “fragile” establishments, “on which the analysis showed problems of risk concentration”, continues Gildas Robert. SVB was thus too focused on the unstable market for technology companies, while the solvency of Credit Suisse and the Italian insurer Eurovita was already in question.
Houses of cards collapsing
The sudden rise in rates, impacting the bond market, only collapsed the house of cards. To understand this, we must remember that a bond is made up of two elements: the remuneration of its holder (coupon) until maturity, and an intrinsic resale value. But in recent years, the coupon was at its lowest. But since the start of the year, new government bonds are delivering up to 4% interest. The old, low-paying titles have therefore lost part of their value.
“The rise in interest rates is at the root of these liquidity and/or solvency problems,” confirms Gildas Robert. Which have been accentuated by a training effect: uncertainty can cause bank run, or bank run. “In a situation of economic and financial instability, panic can lead everyone to want to withdraw their funds,” recalls Gildas Robert.
“In a situation of economic and financial instability, panic can lead everyone to want to withdraw their funds”
SVB, a large part of whose deposits had been placed in long-term bonds, was forced to resell them in a hurry, before their maturity date, in the face of withdrawals from its customers. With considerable losses since these bonds were worth much less than those offered today on the markets.
A situation that no actor can face, even the most important ones. For insurers, including in France, this is a major issue : positioned for their euro funds, whose capital is guaranteed, over the long term, with “durations” (duration of bonds) often exceeding 6 years, they do not have sufficient liquidity to absorb a wave of withdrawals. To react, they would then have to sell their stock of bonds at a knockdown price. Eurovita, a major European insurer, has not recovered!
“We are in a situation of reversal of the financial cycle”
Despite everything, Jézabel Couppey-Soubeyran, lecturer at the University of Paris 1 Pantheon-Sorbonne, wants to put things in a “global” framework. “We are in a situation of reversal of the financial cycle”.
The expert in banking and financial economics does not deny that some have taken too much risk, but she identifies a macroeconomic problem: “We are coming out of fifteen years of very accommodating policies. They unfolded the upward phase of the financial cycle. The tightening of monetary policy and the rise in rates break this wave and cause a decline. »
Should we fear a collapse of French banks and insurance companies? Not so fast! “In France, banking players are mostly large,” recalls Gildas Robert. A majority of life insurance outstandings also concern these systemic banks, stresses Jézabel Couppey-Soubeyran: “Since the development of bancassurance, from the 1990s, the insurance business has been fairly integrated into the large banking groups. Many savers have contracts via their bank. »
“These actors are very solid”
“And these players are very solid”, completes the associate director of Optimind. What about smaller insurers? “We advise the majority of market players,” he explains. I don’t know of companies that would be fragile. But there are obviously groups that are less solid than others. »
The question may arise for recent euro funds, the rapid collection of which had to be invested in not very generous bonds. “Insurers have tried to direct investments towards units of account. This strategy worked well and limited investment in euro funds. Even if, yes, they hold bonds with very bad rates”, explains Gildas Robert.
The Sapin 2 law, an “extreme” solution
To prevent any catastrophe, banks and insurers are subject to strong solvency constraints. In particular equity capital able to respond to redemptions by savers. Since 2016, the Sapin 2 law has added an “extreme” solution.
“If the High Council for Financial Stability considers that we are in an exceptional situation, that we must protect the economy and the balance sheet of insurers, it can activate a mechanism to block withdrawals from 3 to 6 months”, details Gildas Robert. “It would prevent everyone from getting their money back right away. »
“As long as there are no massive takeovers, they are doing very well! »
How to avoid a bank run fatal. Given the current context, should this lever be activated? ” When the politicians say that we are very far from the conditions to block withdrawals, it is really the case “says Gildas Robert. “Insurers have unrealized capital loss obligations. But in terms of technical and financial balance, performance, as long as there are no massive redemptions, they are doing very well! It is if and only if panic reaches savers that things will no longer work out.
Life insurance: can we fear a blocking of withdrawals?
Last week, the managing director of France Assureurs Franck Le Vallois estimated that “there is no risk in life insurance for savers”, adding that he was “not aware of insurers in a situation of difficulty” in France. According to him, redemptions, that is to say withdrawals are “stable”.
“A freezing of life insurance funds will lead to a loss of confidence among savers”
However, financial players fear the application of Sapin 2. “Insurers have as little desire as policyholders for this provision to come into force one day”, we certify on the side of Optimind. Some of our clients talk about atomic weapons, which they don’t want to hear about. »
In addition to being the symbol of an economic collapse, this blockage would have many perverse effects. ” This would clearly break the model of life insurance. The availability of money at all times is one of the major selling points to compete with passbooks. A blocking of funds will lead to a loss of confidence among savers”, continues Gildas Robert.
“It could create a somewhat anxiety-provoking situation”
A degraded image, but also a risk of reinforcing panic. “This could create a somewhat anxiety-provoking situation, warns Jézabel Couppey-Soubeyran. Generate a panic that would not have occurred without this blockage. The researcher is therefore categorical. “It would be inappropriate to activate it too quickly. This device must be handled with care, and used only in the event of an economic disaster. »
The two specialists point out an important element: because of the tax and heritage advantages, life insurance is a long-term investment. “Let’s imagine a massive redemption: what would savers do with their money after having emptied their life insurance?, asks the researcher. They wouldn’t put that under the mattress! »
Especially since the average age of policyholders is over 50 years old. “Holding a life insurance policy is a long-term one, confirms the expert. Of course, not being able to recover your funds is problematic. But for most life insurance holders, this will have no impact,” she continues. A blockage of a few months would not change the life of a contract. “The barrier of taxation and the long-term investment objective are the best protections on the market”, slice Gildas Robert.
The current problem should therefore not be exaggerated. Because savers’ money is unlikely to be threatened. ” The insurance-specific guarantee protects up to 70,000 euros per saver », resumes Jézabel Couppey-Soubeyran. She is even convinced that the state will not abandon a systemic bank. “These groups, which are not always virtuous, are those which are best protected by public authorities. We already know that the resolution mechanisms will not make it possible to avoid a bailout by the public authorities. These banks will be saved, and savers will be saved with it! »
“There will always be an economic player interested in a low-cost takeover of a small insurer”
Gildas Robert sees the same logic for smaller insurers: the state will not let bankruptcy happen. “If this happens, the ACPR [le gendarme des banques et des assurances NDLR], will take over, appoint a temporary administrator, secure what is possible, and look for a buyer. There will always be an economic player interested in buying a small insurer at a low price, in return for guaranteeing the outstandings. “It’s a question of economic culture, according to Gildas Robert: “If in the USA, we are no longer ready to let an actor collapse, it would be even less socially acceptable in France. »
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