Life Insurance: Will Rates on Euro-Denominated Funds Rise This Year?

Will the rates on euro-denominated funds—these life insurance products that are highly popular for their capital guarantee—rise again this year?

Although euro-denominated funds have seen a sharp rise in returns in recent years, the outlook for 2024 is less optimistic. Insurers must balance market conditions with their business strategies to determine the rates they offer, while taking into account changes in competing investment options such as the Livret A.

So, will the rates on euro-denominated funds—those life insurance products popular for their capital guarantee—rise again this year? Unfortunately for savers, the answer appears to be no. According to preliminary estimates from Facts & Figures released on July 18, after paying out 2.65% (after management fees but before social security contributions) in 2023, insurers are expected to pay out 2.50% in 2024, according to current estimates from this consulting firm specializing in insurance.
 

If Facts & Figures’ forecast proves accurate, the decline in 2024 would bring an end to two years of strong growth in returns on euro-denominated funds. “Initially, for 2024, we were expecting growth, with a rate above 3 percent. But numerous factors lead us to believe that this is no longer plausible,” explains Cyrille Chartier-Kastler, founder of Facts & Figures. Indeed, although new premiums now allow insurers to invest in bonds that offer higher yields than those already in their portfolios, this positive impact is slow to translate into performance. 

Especially since yields on newly issued corporate bonds are likely to be lower in 2024 than they were for bond issues in 2023.
 

The firm’s outlook is even bleaker for the other components of euro-denominated funds. “We believe that, in 2024, the equity portion will not contribute positively to the return on the overall portfolio [another name for euro-denominated funds, Ed.] as it did in 2023. On the contrary, we anticipate a sharp correction in the stock market this fall,” explains the founder of Facts & Figures. In its projections, the firm factors in a 10% to 15% decline in the CAC 40 in 2024, following a more favorable first half of the year.
 

Policy Decision
 

However, the rates offered depend not only on market conditions but also on insurers’ business strategies. In 2023, their challenge was to prevent policyholders from moving en masse away from euro-denominated funds toward investment vehicles with a similar risk profile but potentially higher returns, such as the Livret A savings account offering 3 percent. 

In this context, insurance companies did not hesitate to draw on their reserves to artificially inflate the rates on their euro-denominated funds. As a result, while the average rate paid exceeded 2.6% for 2023, the actual financial return on the overall portfolio was only 2.3% last year, according to Facts & Figures. “This apparent gap of 0.3 percentage points truly represents a very significant financial effort for insurers,” comments Cyrille Chartier-Kastler.
 

Another factor driving future declines in returns is that competing investments to the euro fund are expected to gradually become less attractive. Facts & Figures anticipates that the Livret A rate—fixed at 3% by the French Ministry of Finance until next January—will drop by 0.25 or 0.50 percentage points on February 1, 2025. If that happens, it will become easier for insurers to announce a reduction in returns to savers. Since the new Livret A rate will be known in mid-January, it is therefore highly likely that companies will wait until then to officially announce their 2024 return policy.