AFP, Paris :
While borrowers rejoice at the ultra low and even negative interest rates in Europe, savers fret and life insurance companies and pension funds face what is virtually a mission impossible.
Despite a spike in sovereign bond yields in the past couple of weeks, levels still remain ultra-low. The rate of return to investors on benchmark 10-year German and French bonds has stayed below one percent in recent months and the yields on long-term Swiss debt even went negative.
Sovereign bonds are very important for long-term investors as they are a safe investment that allows them to lock into guaranteed returns.
For life insurance companies and pension funds which are investing the savings of others, the safety of sovereign bonds has led regulators to require them to place certain percentages of their investments in bonds.
But the unprecedented rock bottom interest rates are posing a problem as many life insurance polices offer guaranteed interest higher than current bond yields.
Last year in France, life insurance contracts paid on average 2.5 percent.
Life insurance companies can temporarily dig into investment funds to continue to pay high rates and attract investors, but this is a strategy experts said cannot continue if rates remain low.
“This drop in rates and the uncertainty that has accompanied it is affecting life insurance returns,” said Claude Chassain, an actuarial expert at Deloitte.
The level of interest rates has been worrying the industry for months, and analysts and ratings agencies are concerned about the industry. “Low interest rates in the euro area pose substantial challenges to the life insurance industry,” said IMF staff in a blog post earlier this month.
“Mid-sized insurers with guaranteed returns and long-dated liabilities that are not matched by similarly long-dated assets face a particularly high and rising risk of failure,” they said.
While borrowers rejoice at the ultra low and even negative interest rates in Europe, savers fret and life insurance companies and pension funds face what is virtually a mission impossible.
Despite a spike in sovereign bond yields in the past couple of weeks, levels still remain ultra-low. The rate of return to investors on benchmark 10-year German and French bonds has stayed below one percent in recent months and the yields on long-term Swiss debt even went negative.
Sovereign bonds are very important for long-term investors as they are a safe investment that allows them to lock into guaranteed returns.
For life insurance companies and pension funds which are investing the savings of others, the safety of sovereign bonds has led regulators to require them to place certain percentages of their investments in bonds.
But the unprecedented rock bottom interest rates are posing a problem as many life insurance polices offer guaranteed interest higher than current bond yields.
Last year in France, life insurance contracts paid on average 2.5 percent.
Life insurance companies can temporarily dig into investment funds to continue to pay high rates and attract investors, but this is a strategy experts said cannot continue if rates remain low.
“This drop in rates and the uncertainty that has accompanied it is affecting life insurance returns,” said Claude Chassain, an actuarial expert at Deloitte.
The level of interest rates has been worrying the industry for months, and analysts and ratings agencies are concerned about the industry. “Low interest rates in the euro area pose substantial challenges to the life insurance industry,” said IMF staff in a blog post earlier this month.
“Mid-sized insurers with guaranteed returns and long-dated liabilities that are not matched by similarly long-dated assets face a particularly high and rising risk of failure,” they said.
