Newly taken out fixed-rate life insurance policies will see their interest rates fall by this much from January
Interest rates on euro- and forint-based traditional life, health and annuity insurance policies may also fall in January after the MNB reduced the technical interest rate by decree. The change does not apply to insurance policies already taken out, but anyone planning to take out such insurance should hurry up.
The guaranteed interest rate refers to the percentage that insurers guarantee to the customer in a contract for traditional savings insurance. The Central Bank regulates the maximum interest rate that insurers can promise, which is currently 2.3 percent, the maximum technical interest rate. However, under the MNB’s summer regulation
the interest rate will be reduced to 1.8 percent for forint-based policies and will be reduced from 1.1 to 0.6 percent for euro-based policies.
Higher may, lower may not
The MNB says the change is aimed at strengthening financial stability. The central bank fears that, otherwise, they could promise their customers excessive, possibly irresponsible, returns that could jeopardise their own financial situation in the future. Rising inflation in the midst of the economic crisis and a wave of money printing will certainly increase the temptation.
This does not mean that insurance yields cannot be higher than this, only that they cannot promise more than this as a fixed rate.
Also, the MNB’s decision does not affect the interest rates on unit-linked insurance.
The MNB’s current decision only applies to so-called mixed, also known as classic or fixed-return life insurance. In these schemes, the insurer guarantees in the contract the annual interest rate on the savings component and the minimum value of the maturity amount of the savings. The interest rate may be higher if the insurer decides to increase it, but not lower.
However, they can only promise a guaranteed interest rate up to the percentage set by the MNB.
Is a fixed interest rate worth that much?
In practice, in recent years, traditional, also known as mixed, fixed-rate life insurance policies have not produced much higher returns than the promised rate. Under such schemes, the insurer cannot invest the money paid by the policyholder in securities where there is a risk of negative returns. In practice only low-risk and low-yield portfolios, mainly government bonds, are invested by the policyholder.
Mixed insurance differs from unit-linked schemes, where the return is not guaranteed, i.e. in some years there may even be a negative return, as the return on the investment depends on the performance of the underlying securities. It is true that it is rare for an insurer to provide some level of capital or return guarantee on their own decision. The advantage of unit-linked insurance is that the policyholder has a relatively large degree of freedom to construct the portfolio – but if he takes a risk and loses, he loses the return.
In contrast, with mixed life insurance, the client leaves the portfolio to the insurer. This eliminates the possibility of a negative return, but because of other insurance costs, they can also be loss-making. The guaranteed return on mixed life insurance policies has generally been between 1 and 2% in recent years, i.e. rarely reaching the maximum allowed. Actual returns have generally been higher, but not close to the level of unit-linked policies (6-8 percent in recent years).
Nevertheless, Portfolio says there is a good chance that companies will still reduce the technical interest rate on new policies from January, but that they will not reduce the cost of insurance significantly. This is likely to further reduce the attractiveness of mixed life insurance.
More people are taking out insurance despite negative returns
Data published by the MNB in September show that the value of savings in unit-linked life insurance accounts has fallen in recent months, due to the economic downturn and the fall in stock prices. In other words, those with non-fixed interest rate insurance have recorded a loss in returns. However, this is expected to correct as the global economy starts to expand again (probably as early as next year).
