French life insurers face lapse risk hedging problems
French life insurers have to pay back their customers at the drop of a hat – an exposure that rises in tandem with interest rates, as customers seek better returns elsewhere. But with the industry’s traditional hedge for this risk now too pricey, insurers and dealers have to adapt. Laurie Carver reports
French life insurers have a unique exposure to rising interest rates. The country’s Code d’assurance requires life policies to be redeemable in full at any time, in contrast to other countries that allow insurers to reduce their liability through adjustments and penalties. Often, policyholders walk away – or lapse, in industry parlance – when interest rates rise and better investment opportunities appear. The danger is that the value of the bonds held by the policy will have fallen too far to
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