Standard & Poor's non-life insurance rating outlook

Standard & Poor's non-life insurance rating outlook
Standard & Poor's has established a negative outlook for the French non-life insurance market, reflecting a deterioration for a second year in its operating performance in 2000 as a result of under-reserving in 1999 and the ongoing effect of the windstorms that hit the country in December 1999.

The French non-life insurance market in general looks weaker than the European average. This is largely because of the damage caused by windstorms Lothar and Martin in December 1999 but, even before that, the market was not particularly attractive, given its high level of competition.

In 2000, French non-life insurers faced the challenge of implementing sufficient rate increases to catch up with the cost of reinsurance, which rose at the January renewal. The rates on some excess-of-loss treaties tripled, according to some leading reinsurers.

There is already evidence of a significant rate increase in commercial lines. However, rates were previously so underpriced that they are now merely at normal economic levels, rather than providing insurers with a good level of profitability. Consequently, the market still needs to push rates up higher.

Personal lines reflect a potential future threat to the security of the French non-life insurance market. With the country's traditional insurers, mutuals and bancassurers all vying for market share, Standard & Poor's warns that, after the initial predicted rate increases, the ease of price comparison will see companies fall back into competition and a subsequent lowering of rates. As France's mutuals are already operating from a very low cost base, Standard & Poor's considers these the most likely to lead the trend.

The fierce competition in the French insurance market is causing a steady erosion of traditional distribution networks as companies move to cut costs. As a result, over the long term, Standard & Poor's expects to see low-cost providers – such as MSI's (mutuals without intermediaries) and bancassurers – increase their business position.

In order to compete efficiently over the next five years, traditional insurers will face a string of challenges to restructure their distribution networks. Cross-selling is the key issue. The internet can be seen as an opportunity, but most French players have been reluctant to move rapidly in this field because of cannibalisation risks in traditional distribution networks and uncertainty about user-friendliness in the online underwriting process.

Meanwhile, the French insurance market's solvency remains satisfactory and continues to improve, as insurers report growing unrealised gains. Few significant rating changes are therefore likely to occur in the short-term. Consolidation among the traditional first-tier players has now reached its maximum. But mergers between small and medium-sized regional mutuals and the big MSI's are to be expected, following two years of heavy losses in property-casualty insurance and the growing conviction that achieving a critical size is a key objective.

The insurance market
The French insurance market overall is jointly the fourth largest in the world, sharing the position with the UK, behind the US, Japan and Germany. It is currently organised into three principal professional associations:

  • FFSA (Fédération Française des Societés d'Assurances) is the body to which all limited companies and a number of mutuals belong
  • GEMA (Groupement des Soc. d'Assurance à Caractère Mutuel) is the association to which mutuals writing “traditional” life and non-life business belong
  • Mutualité Francaise is the organisation that represents the mutual health insurance sector, a specific market segment also known as the Mutualité 45.

    In addition, there is a mutual society which trades as Groupama, the name adopted by the organising body for agricultural mutuals, of which there are some 10,000 based at a local (often village) level.

    There are liaison committees among these professional bodies which promote the insurers' interests to the state. Groupama is now using GAN, a loss-making insurer bought from the state in 1998, to develop its business in towns and cities. Members of FFSA handle the lion's share of the total insurance market, estimated at up to 80% (life and non-life). In the recent past, the FFSA and GEMA have entered into negotiations to merge, but little progress has been made.

    Of the top ten non-life insurers, only AGF and Generali France are owned by foreign groups and foreign ownership is low compared with many countries in Europe. AGF was acquired by Allianz in 1998 and, in addition to its leading position in the French market, also has strong representation outside France. Generali's French non-life operations were consolidated into Generali France in 1999.

    Mutual non-life insurers produce a significant amount of business in the French market (35% in 1999) and this is slowly growing relative to the proprietary companies. This, and the underlying maturity of the market, has constrained premium rate growth despite escalating claims.

    The French government has proposed a major overhaul of the prudential rules governing the activities of certain mutual insurers. The reform comes as a response to the continuing threat of legal action from the European Commission over France's failure to apply the European Union insurance directive to the mutual health sector. The aim of the bill is to provide a “common pedestal of prudential rules”.

    There are two types of mutual insurer in France: those which work on the basis of fixed contributions (premiums) and those which work on the basis of variable contributions (premiums), and which have the legal right to make a supplementary premium call against policyholders in the event of poor underwriting. This latter category includes Assurances Mutuelles de France, Caisse Générale d'Assurances Mutuelles, MAAF, MACIF, MAIF, Mutuelle de Poitiers, Mutuelle des Provinces de France, Mutuelles Régionales d'Assurances, MATMUT and Société Mutuelle d'Assurance du Batiment et des Travaux Publics.

    These companies are allowed, at the end of any year, to demand extra premium, or contribution, from policyholders – up to 50% of the gross premium written in that year. This extra guarantee is taken into account in calculating the solvency margin for these companies, although, for competitive reasons, it is extremely rare, in practice, for a supplementary premium call to be made.

    However, in 2000, MAIF made a special premium call to cover the losses arising from the storms of 1999.

    The specific mutual grouping known as the Mutualité 45, or Mutualité Francaise, numbers some 3,000 companies. These specialise in the provision of accident/health insurance and are covered by a special law giving them certain taxation benefits. These benefits have provided them with a competitive advantage and allowed them to extend their cover to other personal lines business. Some of the tax advantages available to these insurers have been removed and they now operate within the common EU insurance laws. They are, however, regulated by the Ministère des Affaires Sociales. In October 1998, these insurers formed a new reinsurer, MutRe, to specialise in the protection of their accident/health risks.

    Since December 1988, French mutual insurers have been allowed to issue non-voting participation certificates (titres participatifs), with either a fixed or variable interest rate for a period of no less than seven years. In March 1996, legislation was passed enabling mutuals to offer bonds and repayable non-voting subordinated investment certificates (titres subordonnés remboursables, or TSRs). These rules were introduced to increase the ability of mutuals to raise funds and some mutuals have already tapped the market for this source of finance. The contribution from these funds is restricted to 50% of the solvency margin, or to 25% if fixed-term finance.

    Market features
    For non-life insurance, the principal insurance distribution system remains the agency network, under which an agent is tied to a single company. This has fostered considerable policyholder loyalty in the personal lines market, particularly for the mutuals. Of non-life business in 1999, 35% (1998 36%) was agent-sourced and 34% (33% in 1998) was written directly by mutuals. Bancassurance has developed quickly in the market, particularly for life assurance, supported by the wide distribution network of bank branches. In 1999, 60% of life products were sold over bank counters. By contrast only 3% of non-life business was transacted via bank networks.

    The development of direct underwriters has been modest with growth being hampered by both the strong mutual presence, which has helped to keep personal lines rates relatively low, and the tied agency network. Historically, agents have been remunerated on the basis of commission in respect of all premium introduced, but, for 1997, a new contract was introduced by insurance companies with their agents whereby the remuneration of new agents is linked to a mix of income, underwriting result and client loyalty. This new contract has been widely adopted, but there is no obligation to do so.

    Motor compensation fund
    There is a motor compensation fund supported by a premium tax (0.1% from January 1, 1997, 0.5% prior) on motor liability policies which provides cover to injured parties where no cover exists, and a terrorism fund to compensate those injured through acts of terrorism. In July 1998, motor insurers agreed to contribute 0.5% of gross compulsory premium to a road safety fund for a period of five years.

    Premium taxes
    There is a wide range of premium taxes in force, ranging from nil for marine, 5% for commercial vehicles and up to 30% for personal risks. Third-party liability cover is compulsory for motor insurance, and motor insurance premiums are subject to total taxes of 34.9%, including a levy of 1.9% for the aforementioned motor compensation fund. Agricultural risk premiums include a levy of 10% on property, 5% on agricultural vehicles and 7% on other classes; levies go to the National Agricultural Disaster Fund. Property and liability insurances include a levy of FFr9 (83p) per policy for the terrorism fund. Property insurance also includes a FFr5 (46p) levy for the criminal injury compensation fund.

    Decennial liability construction insurance
    In 1983, a scheme of decennial liability construction insurance was introduced by the state, in which the owner of a new building is provided with guarantees for ten years from the date of acceptance of work done, against damage and liability arising from the construction. A single premium for each damage and liability guarantee is paid at the commencement and is managed on a funded basis. In practice, decennial business written in the 1980s has proven catastrophically loss-making for all insurers. The 1995 and 1996 underwriting years saw significant reserve strengthening for this business line as a result of intervention by the regulator, but the adequacy of premium rates charged for this line remains uncertain.

    Catastrophe cover
    The government provides a guarantee for natural catastrophe cover as an extension to property cover through the state-owned reinsurer CCR. Additional premium rates for this business are laid down by decree and amount to 6% of fire, theft or motor premiums and to 12% on other property premiums. This scheme is not compulsory and companies underwriting this business may cede the risk to any other reinsurer which is not covered by the guarantee, or retain the whole risk. An event can only be designated a natural catastrophe by inter-ministerial order, and when this happens, ordinary property insurance is extended to cover the disaster. For risks placed with CCR, loans are provided by the state to cover the insurer's immediate losses.

    Competitive distortions
    The French insurance market suffers from competitive distortions, which directly or indirectly affect policyholders. Such operators as La Poste, the Treasury and mutual societies governed by the Mutual Insurance Code still enjoy unjustified tax and regulatory advantages.

    Insurance regulation and supervision
    The overall control of the French insurance market comes under the jurisdiction of the Ministère de l'Economie et des Finances which issues licenses. In December 1989, supervision was divided between the Direction du Trésor and the Commission de Contrôle des Assurances.

    The activities of the Direction du Trésor are carried out through three departments:

  • Banking and finance
  • Savings and life products
  • Non-life insurance.

    Its address is:
    Direction du Trésor
    139, rue de Bercy
    75572 Paris Cedex 12
    Tel: +33 1 44 87 17 17
    Fax: +33 1 44 87 22 72

    Its responsibilities include:

  • economic and financial analysis of insurance companies
  • legislation and regulation of insurance business
  • authorisation of insurance companies
  • reviewing contracts of insurance
  • management of public procedures in agricultural catastrophes
  • dealing with queries from policyholders
  • reviewing the participation of the state in nationalised insurance companies and exercising the rights of the state as a shareholder.

    The Commission de Contrôle des Assurances is charged with the control of all insurance companies, and is responsible for ensuring that companies maintain the minimum solvency margin requirements and apply the relevant insurance laws. Its address is:

    Commission de Contrôle des Assurances
    54, rue de Chateaudun
    75009 Paris
    Tel: +33 1 40 82 20 20
    Fax: +33 1 40 82 21 96

    Thus, in essence, the Direction du Trésor makes the rules for the regulation of insurance while the Commission de Contrôle des Assurances ensures their implementation.

    The key European Union directives and legislation were adopted by France as follows:

  • First non-life insurance directive (establishment of an insurance undertaking) implemented from 1974
  • Second non-life insurance directive (freedom of services) implemented from 1990
  • Third non-life insurance directive (harmonisation of framework) implemented from 1994
  • Fourth company law directive (harmonisation of insurance accounting) implemented from 1995.

    The regulatory environment for French insurance was first established in 1930, when the contents of an insurance contract were defined. Life insurance and non-life insurance cannot be underwritten by the same company. An insurance company must either be a société anonyme, or SA (a limited liability company) or a société mutuelle d'assurance (a mutual). The minimum share capital for limited liability companies is usually FFr5m (£463,800), of which at least 50% must be fully paid, but note that in certain circumstances the minimum capital can be FFr3m (£278,300). Mutual companies must maintain establishment funds of not less than FFr2.5m (£231,900), although again, in certain circumstances, FFr1.5m (£139,200) will suffice. In practice, the level of capitalisation is determined by the Direction du Trésor through reference to the company's business plans.

    Reinsurance companies
    Historically, those companies writing exclusively reinsurance business did not require the authorisation of the Direction du Trésor and did not fall under the supervision of the Commission de

    Contrôle des Assurances. However, following the introduction of the new insurance accounting system applicable for the 1995 fiscal year (and at their request), specialist reinsurers, to some degree, were brought under the supervision of the Commission de Contrôle des Assurances. The

    Insurance Code was amended to introduce, first, the compulsory submission of accounting and financial documents to the supervisory authorities and permit the on-site inspection of reinsurance companies; and, second, the exercise of sanctions, should a French reinsurer fail to meet its commitments.

    Prior to this change, the reporting for specialist reinsurance companies was less detailed than for general non-life insurers, and rarely included any business line information. However, the new insurance accounting system is also applicable to reinsurers and, since the 1995 fiscal year, their financial statements have been comparable in content to general non-life companies, except that no business lines information is disclosed.

    Companies must maintain the minimum margin of solvency as laid out in the EU directives. The solvency margin represents a company's total assets less all foreseeable liabilities and any intangible assets, and is commonly calculated as follows:

  • paid-up share capital, or initial funds if a mutual
  • 50% of uncalled capital, or the initial fund, provided the paid-up capital is greater than 25% of the total capital
  • statutory and free reserves (not underwriting reserves)
  • unappropriated profits
  • hidden reserves arising from the revaluation of assets, or over-estimation of liabilities which can be independently substantiated
  • for mutuals, up to 50% of the difference between the maximum, supplementary contribution in a financial year and the amount paid in
  • any subordinated debt as approved by the regulator.

    The solvency margin so calculated must then be in excess of the minimum margin calculated on the higher result derived from the two following formulae:

  • a premium basis: The total of direct and reinsurance premiums due in the previous financial year, less cancellations and excluding premium taxes is divided into two portions, one of up to ECU 10m and the second being the remainder. The minimum solvency margin is therefore the sum of 18% of part one plus 16% of part two, multiplied by the ratio of net claims outstanding to gross claims outstanding (which ratio is not to be less than 50%).

  • a claims basis: The total of claims paid, net of salvage but before reinsurance recoveries for the past three (or seven) years, plus the movement in the provisions for outstanding direct and reinsurance claims between the last financial year and three years prior, is split into two portions, one of ECU 7 million and the second of the remainder. The minimum solvency margin is therefore the sum of 26% of part one plus 23% of part two, multiplied by the ratio of net claims outstanding to gross claims outstanding (which ratio is not to be less than 50%). Limited liability companies (not mutuals) must maintain a guarantee reserve as a supplement to the technical reserves equivalent to not less than one third of the solvency margin. The minimum solvency margin is rarely publicised by a company. In the event of the minimum solvency margin not being maintained, the Commission de Contrôle des Assurances can instruct the company to inject more capital, to cease accepting new business or to merge with another company.

    It should be noted that, in common with other EU countries' insurance regulators, there is a project to re-evaluate insurance company solvency by reference to a risk-based capital model. However, we do not anticipate that such a system, already utilised in the US, will be adopted in the near future.

    French property/casualty insurance companies enjoy a sound financial base: for 1999, the solvency margin came to 6.4 times the minimum European regulatory margin, i.e. 16% of annual premium income or 23% of claims.

    France was a founder member of the European Community, now the European Union (EU), which was formed in 1957 by the Treaty of Rome. It is, with Germany, the most prominent member of the EU. The currency is the French franc (FFr), but with the move to economic and monetary union adopted by 11 EU countries in January 1999 (Austria, Belgium, Finland, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain) the currency will become the Euro (¤) in January 2003. The rate was ¤1 = FFr6.56 and £1 = FFr10.78 as at July 27, 2001.

    France has a population of some 61 million, and an area of 547,000 square kilometres; it is a mature, stable democracy.

    Politics and economics
    The president is Jacques Chirac, elected in 1995, who was formerly the leader of the right wing RPR party. Prime Minister Lionel Jospin of the Socialist Party leads a coalition government in the National Assembly. The next parliamentary and presidential elections are due in 2002.

    Given the depth and diversity of France's economy and current fiscal consolidation, the ratings on France are well supported and should remain secure against virtually all economic and financial stress scenarios. Sustained improvement in the underlying fiscal position will require more active and radical reform of public expenditures, taxation, the labor market, and the health and pension system.

    In the longer term, unfunded future pension liabilities may threaten fiscal consolidation, and there is increasing urgency for reforms such as an increase in the effective retirement age and the diversification of financing the pay-as-you-go (PAYG) system.

    France insurance analysts contacts:

    Kevin Willis London 020 7847 7085
    Yann Le Pallec Paris +33 1 4420 6725

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