French life insurers have a track record in a competitive environment that their counterparts elsewhere lack. This should stand them in good stead. By Hugh Wheelan
Although the French life industry faces a number of both challenges and opportunities in the years ahead, the country’s insurers have more than their fair share of competitive experience over other European markets that have only recently been deregulated. And the market’s very strong capitalisation and good earnings mean French life groups face the future in a strong position.
Consequently life ratings have remained relatively stable since 1998 – only four have changed – although Standard & Poor’s noted significantly reduced premium volumes last year.
AGF Vie was upgraded from AA– to become France’s first AAA-rated insurer, reflecting its new key role in the Allianz group after last year’s acquisition. Groupama Vie was lowered from AA– to A+ in recognition of the major strategic challenge faced in restoring the GAN group’s operating performance following last year’s buy-out. Les Assurances Fédérales Vie was upgraded from BBBpi to BBB+pi following a refinement of the S&P criteria, and SOCAPI was assigned a rating of Api after the satisfactory outcome of the acquisition of CIC, SOCAPI’s principal shareholder, by Crédit Mutuel.
In addition, 21 new ratings have been added since July 1998, ranging from AA for Abeille Vie to Bpi for Mutavie.
However, market polarisation has meant French insurers are having to choose between becoming members of ever larger financial groups or transforming themselves into specialist niche operators – while mid-size players get increasingly squeezed.
France’s AA and above groups, mainly bancassurers and more established groups, possess either strong capitalisation and earnings, through economies of scale and cost-effective distribution, or have the advantage of being integral parts of large financial services groups with excellent flexibility and consistently successful track records.
Strong capitalisation by itself will not be sufficient, though, for A-range insurers. Those employing capital strength to sustain themselves while they transform into more efficient operations may narrow the competitive gap with their higher-rated peers. Those diluting capital to maintain market share or permitting market position to decline are likely to fall further behind, according to S&P.
Simultaneously, the erosion of fiscal incentives for life contracts and lack of real stimulus to private pensions is likely to mean lower future growth and pressure on margins – to the detriment of smaller, less capitalised companies.
But the overall strength of the French life market is evident, with 97% of companies rated in the secure range of BBB or higher, with BBB companies accounting for 22% of the rated population, A range groups 42% and AA groups 42%.
Another important issue for French life insurers is satisfying policyholder expectation. The French generally look for payouts above the minimum guarantee, based on performance and league tables.
However, some less efficient insurers have temporarily boosted payout table positions by upping benefits and bonuses to policyholders – an unsustainable strategy for those with small capital bases, reckons S&P. Furthermore, French insurers are increasingly looking to reinsurance financing and the use of alternative risk transfer techniques to fund acquisition, improve capital efficiency and limit downside risk. So financial strength is a key component for counterparties in assessing whether they will provide financing.
The potential privatisation of pensions could become a vast business opportunity as could regulatory changes on investment freedom, although paradoxically both may to lead to greater state interest in insurance and tighter control of the market.
Similarly, despite the profitability of the French market it is very competitive and likely to become more so, thus the attraction of foreign company entry is waning.
Green field start-ups in France are, in reality, not feasible because of the need for distribution and brand name for success. Consequently, acquisition is the sole route into the market, although there are very few life insurers of appreciable size left.
Crédit Lyonnais-owned UAF (Union des Assurances Fédérales) is a possible candidate, as is France’s largest life insurance group CNP in the longer term, should full divestment of public sector control occur.
Finally, the domination of the French market by bancassurers could also begin to be threatened in the coming years by the proliferation of non-insurance retailers with similar distribution networks looking to enter the market, as in the UK, says S&P.