ECB rate cut: will the yield on your life insurance collapse?

With the ECB’s fourth key rate cut, returns on euro funds could come under pressure. But with insurers’ reserves and the attractive rates of French debt, the performance of your life insurance contracts should not suffer too much. Explanations.

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And four to end the year. This Thursday, December 12, the European Central Bank (ECB) recorded the fourth reduction in its main key rate – the deposit rate – since June 6. A decrease of 0.25 points which brings the latter to 3%, and augurs good news in 2025 for households: property loan rates should fall further. On the other hand, this is less good news for savers. ECB rates directly affect the return on their short-term secure investments, such as bank accounts, but also on their capital-guaranteed life insurance policies.

Euro funds – which ensure savers always get back the sums invested – are in fact made up mainly of government bonds. Debt securities whose yield is partly determined by the level of key rates. This is why over the last two years, these high rates have allowed euro funds to regain some color in terms of returns (2.6% on average in 2023, 1.8% in 2022) after years of scarcity. Should we then fear that this parenthesis will close with this new drop in rates, and that the performance of your contract will drop significantly?

A painless rate cut for your 2024 yield

To reassure you from the outset, the 2024 return on your contract – which will be communicated to you by your insurer in January – will not be altered by this drop in rates. First because “the performance of euro funds is always calculated by insurers three to four months before their announcement”explains Olivier Rull, co-founder of Caravel, a digital life insurance distributor. The rate at which your savings will be valued is therefore already more or less fixed. You should also know that this rate does not identically reflect the performance of the bonds that your insurer has in its portfolio. The latter can in fact improve the rate served by drawing on its reserves, in particular in the provisions for profit sharing (PPB) set aside by insurers to improve the rate displayed in the event of a difficult year.

A strategy used for example in 2023 by insurers: “It is estimated that the average performance of insurers’ general assets (their portfolio of bonds, shares, real estate, etc. Editor’s note) showed an average performance of 2.3% at the end of this exercise. The sector therefore had to draw on its reserves to ultimately provide an average rate of 2.6% to savers. explains Cyrille Chartier-Kastler, founder of the Facts & Figures firm.

However, these reserves are far from being exhausted. According to data from Good Value for Money, the reserves of life insurers’ euro funds increased from 176 billion euros at the end of 2022 to 156 billion euros at the end of 2023. In other words, even in the event of lower bond performance due to the fall in rates, insurers still have enough to maintain the rates paid. On average, euro funds should therefore post a rate of 2.5% in 2024, a very slight decline compared to 2023, despite the start of the rate cut on June 6.

A risk of falling euro fund rates in 2025?

In reality, the question therefore arises more for the 2025 returns on your life insurance contracts. The ECB should in fact continue its downward policy: “With a weakened economy and inflation under control, this paves the way for further rate cuts. “That’s why we have this forecast of 2% in June next year”anticipates Ulrike Kastens, European economist at DWS. However, the remuneration of your savings should be protected by… the French political and economic situation.

For now, “the drop in rates does not have that much impact on the yields of 10-year French government bonds”, points out Cyrille Chartier-Kastler. However, euro funds are fond of these famous 10-year French OATs which maintain a yield of 3%. “Given current events, in my opinion, the OAT will remain at a sustainably high level, or even exceed 3% in 2025”predicts the expert. A level of “coupon” (the yield on a bond) which, despite the reduction in ECB rates, could maintain the average performance of euro funds around 2.5% to 2.6% in 2025 according to him.