Technical interest rate
The return an insurer commits to in advance and uses to discount its commitments, capped by regulation to limit the promise.
April 1997: Nissan Mutual Life failed in Japan, the first Japanese life insurer to go under since the war, weighed down by guaranteed returns sold in the high-rate years. The technical rate is that return the insurer builds into its pricing and reserves up front, and therefore commits to pay whatever markets do. It cuts both ways: the higher it is, the lower the premium for a given benefit, and the heavier and longer the commitment. French regulation caps it by reference to the average yield on government bonds, lower the longer the commitment (Article A. 132-1 of the Insurance Code). The point is that no insurer should buy market share with a promise it will not keep over thirty years. Contracts written in France in the 1990s with a 4.5% guarantee stayed on balance sheets through the whole decline in rates that followed. No internal discipline has ever been enough to resist funding a long promise out of the rate environment of the moment.
The average return on French euro funds fell from 4.1% in 2007 to 1.3% in 2021, before recovering toward 2.6% in 2023 on ACPR figures. Contracts written in the 1990s with a guaranteed technical rate of 4.5% stayed on the balance sheet throughout that descent. The Article A. 132-1 ceiling does not date from that descent: pegged to the average government bond yield, it let 4.5% through as long as the State borrowed far dearer. All it forbade was renewing the promise once rates had fallen.
- Addactis, regulatory presentation on life and non-life technical rates (Article A. 132-1: 60% of the six-month average TME), March 31, 2024
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