The outlook for the French life insurance sector remains stable, with potential for further, though slower growth, Moody’s Investors Service said in a new Industry Outlook. Key challenges relate to the ongoing threat of litigation risk in and adapting the capital structure to Solvency II requirements.
The French life insurance market has experienced solid growth since 2004 and particularly in 2006 thanks to a confluence of favourable but non-recurring factors.
Moody’s therefore anticipates a slowdown in growth in the short term, which should in particular affect those life insurers that are subsidiaries of banks, which benefited the most from the growth in 2006.
“However, Moody’s considers that the market has not yet reached maturity. Life insurance represents a constantly rising share of savings by French households, thanks in particular to the growing role of distribution channels such as banks and, more recently, independent financial advisors, which have contributed to product innovation,” says Timour Boudkeev, Vice-President, Senior Credit Officer at Moody’s and author of the report.
Moody’s believes that the overall reserving risk of French life companies has been decreasing in recent years. New traditional savings products tend to have low guarantees and the stock of products with high guarantees is decreasing.
In addition, unit-linked products account for a growing proportion of life insurance new business and reserves. Most French life companies are now focusing their marketing efforts on these products due to their lower capital requirement and excellent margins — although Moody’s cautions that a significant rise in interest rates could potentially make traditional products more attractive again.
Furthermore, liabilities relating to annuities remain low and longevity risk is well contained as a result of prudent reserving. Moody’s does not anticipate rapid growth in pension business in the short term. “Group pension business is likely to develop first, driven by employee savings schemes, followed by individual pension business as the substitution rate of state pensions is set to decrease. Another possible development is the combination of retirement and long-term care products to offer comprehensive retirement solutions to the ageing population,” Boudkeev explains.
Nonetheless, the success of unit-linked products and the recently tightened regulation around the provision of information to policyholders increase the exposure of life insurers to legal risk, as evidenced by recent cases in which companies were forced by courts to reimburse losses suffered by policyholders.
The French life insurance market is also experiencing growing competition.
Low-cost players and policyholder associations have recently exerted some pressure on fees, which may reduce the profitability of life insurers going forwards.
However, the rating agency believes that financial fundamentals are sound in the French market, with prudent reserving practices and low asset risk. Capitalisation is good, although partly reliant on subordinated debt and unrealised gains, particularly in the case of companies experiencing rapid growth.
Future sales of French life insurance products will also be heavily dependent on tax incentives. A change in tax advantages for insurance products — such as the recent modification of the inheritance tax regime — could have a negative impact on market growth.
