The domination of French life assurance by bancassurance seems unstoppable. In a market worth FF450bn (€72bn), bancassurers have a massive 67% share. Sara Fenelon, of reassurer SCOR Vie, attributes this to strong customer relationships. “The banks are very close to their customers, especially in towns and villages in rural France. They have been at pains to understand customers as individuals and have been able to target products and services in a very precise way.”
Future development of the French banking industry could influence bancassurance either way. On the one hand consolidation means that bigger banking groups will have still more scale efficiencies on their side. The merger of BNP and Paribas, for example, has created a banking giant. Although for the time being the two life operations are being kept separate and the individual brands retained, it should be possible to derive significant efficiencies from the combining of back-office operations.
But cost advantages could be undermined by the intensity of competition among banks. The quest for operating efficiencies in their retail banking operations could see branch closures on a wide scale – some predict by as much as 50%. Pruning branch networks would reduce distribution capability – although the balance could be at least partially redressed via remote channels like the phone and the internet – and would risk damaging those firm relationships.
With the banks and the traditional life assurance giants such a powerful force collectively, there are only thin slices of the market cake left for other players, though there are still plenty of life companies vying for a share. According to Standard & Poor’s analysis of the market figures for 1999, companies ranked 10th or lower in terms of premium income had less than a 3% market share, and many had around 1% or less with few signs of comparative growth. Can these small operators survive? The omens are not good. There has already been significant consolidation and that looks like continuing; recently Cardif became part of Natio Vie, itself a constituent of the BNP-Paribas group. Mutual companies are restricted in terms of mergers but have been forming joint ventures to place themselves on a stronger competitive footing.
Yet another twist to evolutionary development could be the injection of more foreign capital, although such a tough competitive climate represents a strong deterrent unless a newcomer can leverage a strong and distinctive competitive advantage able to deliver the necessary return on investment.
Over the last couple of years the French life market has grown strongly – up 16% in 1998/9 and by as much as 20% in 1999/2000. However, premiums are recovering from a lean 1998 when premium volumes slumped by 17% over the previous year. This was because 1997 benefited from a one-off window of concessions prior to changes in personal taxation, and partly because the following year saw the introduction of harsher tax treatment of short-term savings plans
Some of the growth in the French life market can be attributed to unit-linked policies, which have rocketed in popularity in recent years, encouraged by strong stock market performance. In 1995 unit-linked plans made up 10% of total premium income; four years later the percentage had tripled. More traditional product portfolios are still invested largely in fixed interest securities. While legislation does place restrictions on the proportion of equities in the investment mix, most life companies have a conservative 15%-20%. But as Jacques Fabeyrol of Swiss Re points out, “liquidity of assets is an important factor for life companies. While French investors need to take account of any tax penalties of surrender, the policies themselves generally have no or only minimal cash-in penalties, so there is a need to have ready access to a certain proportion of invested assets.” The withdrawal risk is compounded by the gradual disappearance of long-term investment guarantees.
Life offices, of course, play a pretty minor role in the provision of retirement pensions. The combined state and compulsory ARRCO and AGIRC supplementary pension schemes provide generous benefits. Nevertheless additional schemes sitting atop the standard provisions do exist, and the great majority of these are insured for tax efficiencies. But these are small beer in the context of life business overall: contributions represented a mere 7% of total premium income in 1999. In the main employers are reluctant to provide extra pension benefits on grounds of cost, the generosity of regular provision and the recent state of the labour market, in which the balance of bargaining power has been in their favour. The cost disincentive is strengthened by the requirement for all employees to be included, consistent with the principles of solidarity on which the pensions system is based. As if that were not enough, the tax treatment of contributions means that the additional schemes have no appeal for high earners.
Life companies, not surprisingly, are frustrated. “We have been waiting years for changes to the pensions system that give opportunities to life companies, but we are still waiting,” said one. Change has come tantalisingly close from time to time, but never close enough to become reality. Legislation for a US 401(k)-style plan has been passed, but the enabling regulation has not materialised under the left-wing coalition government which subsequently came to power.
While life companies resign themselves to waiting a little longer for reform, they may take small comfort from the belief by some commentators that one way of avoiding a pensions crisis is to maintain compulsory contributions at current levels, forcing down benefits on retirement and providing an incentive to make additional provision by other means, including regular insurance savings.
Tim Reay of consultants Bacon & Woodrow warns, though, “there’s a danger that creating new voluntary individual pensions savings plans could divert funds from life companies’ existing products, resulting in a smaller net gain for them. There may also be a threat from banking and mutual fund products, but that depends on the degree of flexibility built into any new plans. A requirement to buy an annuity on retirement would favour life companies, and they’re angling for this.”
The outlook for French life companies, then, is mixed. They retain a strong position in the personal savings market, even though a new and bigger pensions market is denied them – at least for the time being. But the competitive climate is harsh, and the big groups of bancassurers and traditional companies have plenty of clout (the top 10 players have about 60% of the market). Life companies generally are well capitalised and therefore in a relatively strong position to withstand competitive storms. Whether the medium and smaller players without a clear value proposition for a well defined niche target market are able to last out until the storm finally abates is another matter.