French savers face a puzzling disconnect. The risk-free rate in the eurozone, measured by the €ster (euro short-term rate), sits around 1.9%. Yet walk into any bank or browse online insurance platforms, and you’ll find fonds en euros (euro-denominated funds) in assurance-vie (life insurance) contracts advertising returns of 3%, 3.5%, even 4% or more. How is this possible? The answer reveals a complex system of asset management, regulatory arbitrage, and a controversial practice that has some policyholders subsidizing others.
The Composition Secret: It’s Not Just Government Bonds
The first clue lies in what these funds actually hold. Contrary to popular belief, fonds en euros are not parked in risk-free money market instruments. As one industry analysis reveals, a typical dynamic euro fund contains a diversified mix: monetary instruments, bonds, real estate, and a small equity pocket.
The breakdown is revealing. For so-called “dynamic” euro funds, roughly 25% of assets are risky, split between equities and real estate. Among the bond portion, 77.5% consists of corporate obligations (higher-yielding, riskier) versus only 22.5% in sovereign bonds. This allocation explains part of the outperformance, corporate debt pays significantly more than government paper. French 10-year government bonds (OATs) yield about 3.5% currently, but corporate bonds can yield 4-6% depending on credit quality.
This diversification matters. While the €ster reflects overnight lending between banks, euro funds capture credit spreads, duration risk, and equity premiums. However, this alone doesn’t bridge the entire gap to 4% returns. The real magic, and controversy, lies elsewhere.
The Smoothing Mechanism: A €152 Billion Buffer
French insurers operate under a unique system called Provision pour Participation aux Bénéfices (Profit Participation Provision, or PPB). When investment returns are strong, insurers are only legally required to distribute 85% of financial profits to policyholders. The remaining 15% flows into reserves.
These reserves have ballooned to €152 billion, representing 11.64% of total euro fund assets. This massive buffer serves as a shock absorber. In lean years, insurers tap these reserves to maintain attractive rates. In good years, they replenish them. The theoretical math suggests this could support an extra 1.5% return for seven consecutive years, even if markets turn south.
But here’s where it gets controversial. Insurers use these reserves discretionarily. There’s no automatic mechanism linking your personal returns to the fund’s actual performance in a given year. The insurer’s board decides how much to distribute, balancing competitiveness, profitability, and long-term solvency. This “smoothing” means your 3.5% return might come partly from profits earned years ago by different investors.
The Boost Trap: New Money vs Loyal Policyholders
The most contentious practice involves “boosted rates” (taux boostés). In January 2026, Garance announced a 3.5% rate for its main fund. AMPLI-ASSURANCE VIE offers 3.75%. CORUM Life advertises 4.1%. These eye-catching numbers often come with strings attached, or hidden costs.
Many boosted rates apply only to new money or for limited periods (typically one to two years). The insurer dips into those €152 billion in reserves, built from past profits, including those earned on existing clients’ money, to finance these promotional rates. As one industry observer bluntly states, this practice is “perfectly dishonest” because it uses benefits from historical clients who didn’t receive those rates in the past to attract new investors.
The mechanics work like this: You, as a loyal policyholder since 2020, might have earned 1.5-2% during the low-rate years while your insurer built reserves. In 2026, a new client gets 4% on their fresh deposit, subsidized partly by those same reserves. You might get a bump too, but not the full promotional rate. The insurer’s goal is acquiring long-term clients who will eventually contribute to reserve replenishment.
The Transparency Problem
Unlike UCITS funds (Undertakings for Collective Investment in Transferable Securities), which must disclose detailed holdings quarterly, fonds en euros operate with remarkable opacity. You won’t find a list of specific bonds or properties in your annual statement. This lack of visibility frustrates sophisticated investors who want to understand exactly what they own.
This opacity extends to performance attribution. When your statement shows a 3.5% return, you can’t determine how much came from:
– Current year bond yields
– Real estate appreciation
– Equity market gains
– Reserve drawdowns
The Autorité des marchés financiers (AMF, France’s financial markets regulator) has raised concerns about this, but reform moves slowly in France’s conservative insurance sector.
Sustainability: A House of Cards?
The current environment, higher interest rates since 2022, has been a gift to insurers. As old 0.5% bonds mature, they’re replaced with new 4%+ instruments. This “embedded yield” improvement explains much of the recent rate surge. La France Mutualiste, for instance, invested nearly €800 million in high-yielding bonds in 2025 alone.
But several clouds loom:
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Reserve depletion: Reserve ratios dropped from 4.41% to 3.91% of assets in 2024. Continued high payouts without replenishment threaten future stability.
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Rate cycle risk: If rates fall again, the embedded yield advantage evaporates. Insurers can’t keep paying 4% if their new bond purchases yield 2%.
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Competition pressure: With the Livret A (regulated savings account) dropping to 1.5% in February 2026, insurers face pressure to maintain wide spreads to attract flows. But this may prove unsustainable.
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Regulatory scrutiny: The AMF and Banque de France are watching reserve levels closely. Solvency ratios above 250% provide comfort for now, but rapid deterioration could trigger intervention.
The CTO Alternative: Are Fees the Real Enemy?
Many French investors now compare assurance-vie to CTO (Compte Titres Ordinaires, standard brokerage accounts) for pure investment purposes. The argument: why accept opaque funds and high fees when you can build a custom ETF portfolio for 0.2% annual costs?
A typical assurance-vie charges:
– 1-2% entry fees on contributions
– 0.6-1% annual management fees on euro funds
– 0.5-1% on unit-linked funds
Over 10 years, these fees can consume 15-25% of returns. In contrast, a self-managed CTO with low-cost ETFs keeps more money in your pocket. The trade-off: no capital guarantee, no tax advantages after eight years, and no estate planning benefits.
The performance and pitfalls of assurance-vie (life insurance) funds in France have become a hot topic among cost-conscious investors. Many are splitting strategies: using assurance-vie for the tax wrapper and guaranteed portion, while keeping aggressive growth assets in a CTO or PEA (Plan d’Épargne en Actions, the French tax-advantaged stock account).
Practical Implications: A Three-Tier Strategy
Given this landscape, French savers should consider a nuanced approach:
For the security bucket (0-5 year horizon): Euro funds remain attractive for capital preservation, but shop aggressively. The gap between top (4.1%) and bottom (2.1%) performers is widening. Prioritize insurers with strong reserve levels and transparent allocation policies. La France Mutualiste’s 3.5% rate, backed by direct real estate holdings and a 250%+ solvency ratio, offers a compelling combination of yield and safety.
For the growth bucket (5-15 years): Split between boosted euro funds (with minimum UC requirements) and diversified unit-linked funds. The surge in French ETF adoption and retail investor behavior shows that investors are getting smarter about costs. Consider insurers offering free arbitrage and low-cost ETF access.
For the legacy bucket (estate planning): The 8-year tax advantage remains unbeatable. After eight years, gains benefit from a €4,600 annual allowance and reduced 7.5% tax rate. For wealth transfer, the €152,500 exemption per beneficiary is invaluable. Even with mediocre returns, the tax savings justify assurance-vie for inheritance purposes.
The Uncomfortable Truth
French euro funds deliver 3-4% returns in a 1.9% world through a combination of genuine investment skill, regulatory flexibility, and a controversial redistribution mechanism. The system works, until it doesn’t. As declining risk-free returns and shifting saver behavior in France push more capital toward assurance-vie, the pressure on reserves intensifies.
The practice of using old clients’ money to attract new ones creates a moral hazard. It rewards disloyalty (switching for better rates) and punishes loyalty (staying put during lean years). Some industry voices call this “perfectly dishonest”, yet it remains standard practice.
For now, the music plays on. Rates stay high, competition fierce, and savers happy. But behind the scenes, the €152 billion reserve buffer is both the system’s greatest strength and its potential Achilles’ heel. If insurers continue paying 4% while earning less, those reserves will deplete rapidly when the next crisis hits.
Your move as an investor: treat euro funds as a tactical allocation, not a strategic religion. Milk the boosted rates while they last, but keep a watchful eye on reserve levels and fee structures. And maybe, just maybe, consider whether that cousin talking about ETFs at family dinner has a point after all.
