Inflation is back after nearly disappearing from developed economies. How can you take advantage of this new environment with your life insurance policy? By Gilles Belloir, managing director of the online broker Placement-direct.fr.
2.8%! This is the inflation figure in France in December 2021 according to INSEE. A level that we had not seen for nearly 15 years. Funds in euros, supports in shares, in bonds… What could be the profitable choices for your life insurance policy if the price increase were to settle permanently?
The fund in euros: insufficient for the moment
Traditional support of a life insurance contract, the fund in euros has a permanent capital guarantee. Given an average return which should be slightly above the 1% mark in 2021 (net of management fees but before social contributions of 17.2%), it is not enough, on its own, to to counter inflation.
Composed of approximately 80% bond assets, the euro fund has suffered for years from low interest rates. If a rise in inflation brought with it a rise in interest rates, the first effect of this would be to lower the price of fixed-rate bonds held by an insurer in its general assets. Nothing serious as long as it is measured, insurers have very significant unrealized capital gains and multiple reserves.
In a second step, the saver could foresee a gradual rise in the yield of his fund in euros. However, it will have to be patient before it becomes significant, the time needed for the company to reconstitute a significant stock of more profitable bond securities. The erosion of yields has been very slow, it is likely that their eventual increase will be just as slow.
Bonds: indexed to inflation only
While fixed-rate bonds, which will be very sensitive to changes in interest rates, should be avoided, inflation-indexed bonds are regaining interest and appear to be an attractive solution. These pay a coupon and/or a redemption at the higher term in the event of an increase in the level of inflation.
However, this insurance against price increases comes at a cost. Inflation-linked bonds generally offer a lower yield than a fixed-rate bond with comparable characteristics.
Equities: a rigorous selection is essential
When interest rates rise, the bond market regains attractiveness in the eyes of investors, often to the detriment of equities. Some sectors of the rating, however, tend to benefit from such a scenario. This is traditionally the case in the banking sector. Not only is it suffering a very steep discount today, but above all it could benefit from a possible steepening of the yield curve with the return of inflation.
Let’s not forget that a bank’s main job is to transform short-term deposits into medium-long-term loans.
Real estate: more residential and thematic
Real estate offers an effective guarantee against inflation because, barring a real estate crisis, the price of real estate is aligned with the standard of living, as are rents. However, there is a caveat to this. A possible rise in borrowing rates caused by a resurgence of inflation would impact the real estate purchasing power of buyers. This would then tend to put downward pressure on prices.
A careful selection of real estate supports within one’s life insurance contract (SCPI, SCI, etc.) also appears to be essential at present. Traditionally, professional real estate of offices and shops is strongly represented. However, he suffered with the health crisis. Residential real estate, less exposed, or certain topical themes such as health or logistics then appear as interesting alternatives.