Insurance

Non-life / France

French Non-life Insurance

Rating Outlook Revised to Stable
Outlook Report
Rating Outlook

Rating Outlook
Revised Sector Outlook: Fitch Ratings has revised the rating outlook for the French non-life insurance sector to stable from negative. A stable sector outlook indicates that the agency believes that most non-life insurer ratings will be affirmed as they are reviewed over the next 12-24 months. Weak Premium Growth: The French insurance industry is facing a number of challenges, which have been amplified by the financial crisis. The difficult economic environment has led to the emergence of low-cost offers that are more attractive to policyholders looking for less expensive and simpler insurance products. As a result, premium growth continued to be weak in 2010. Resilient Performance: Albeit the challenging environment, the sector has shown some resilience and the agency believes that non-life insurers have started to demonstrate their ability to implement appropriate tariff increases within a more benign claims environment. Recovering Underwriting Profitability: Non-life insurers experienced some recovery in their technical results in 2010, thanks mainly to their tariff increase actions and the improvement in the claims environment. No material climate events occurred during the year, while at the same time the total cost of claims in the motor insurance sector stabilised. Growing Role of Bancassurance: The bancassurance channel has continued to play a growing role in the non-life sector. Fitch believes this trend will intensify in 2011 with the development of La Banque Postale's non-life insurance offer.

STABLE

What Could Change the Outlook

Competition on Tariffs: A return of aggressive pricing policies would have a negative effect on the sectors profitability and could prompt a revision of the outlook to negative. Volatility of Financial Returns: In a context of low investment returns, pricing discipline is even more essential to preserve profitability. Prolonged low financial returns would have a negative impact on the sectors outlook.

Related Research
Other Outlooks
www.fitchratings.com/outlooks

Analysts
Marc-Philippe Juilliard +33 1 44 29 91 37 marcphilippe.juilliard@fitchratings.com Vanessa Flores +33 1 44 29 92 77 vanessa.flores@fitchratings.com

www.fitchratings.com

3 October 2011

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Key Issues
Fitch expects the market to remain fundamentally cyclical, although less so than historically. Despite appearances to the contrary, growth potential for non-life insurance companies is limited. This is due to the relatively saturated market for individual policies, unacceptably high tariffs in some specific instances, and political and social choices that limit private insurance companies' operations in certain market segments. Such limits are difficult to reverse, particularly in health insurance, although a gradual shift is expected to continue. At the present stage of the business cycle, Fitch does not see the potential for further significant improvement in non-life insurers' profitability and estimates that the sector's average combined ratio will be around 100% in 2011-2012. The expected pressure on non-life insurers' financial results should encourage them to implement further increases in tariffs, particularly in property lines. Fitch estimates that the profitability of non-life insurers in 2011-2012 will depend on the extent to which insurers will be able to implement further tariff increases and on whether or not they face material winter storm activity.

Sector Overview
By premiums written, the French non-life insurance market has grown by 3.9% per year on average since 2000, excluding accident and health premiums. This rate indicates relatively weak structural growth, with successive waves of tariff increases and decreases. In 2010, premiums written for property and casualty insurance increased by 2.2% compared with 2009, while premiums on accident and health policies increased by 4.2%.
Figure 1

The Slow Growth of Non-Life Insurance in France

(EURbn) 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source FFSA-GEMA Property & casualty premiums Accident & health premiums

Over the first six months of 2011, the property and casualty insurance market experienced accelerated growth, up 4% compared with the same period last year.

A Mature Market
Only Modest Growth in Insurable Base
Non-life insurance coverage purchased by French individuals and companies mainly relates to property (predominantly motor vehicles and real estate). Therefore, a reasonable estimate of the insurance base can be made simply by recording the number of motor vehicles on the road and the housing stock. The number of motor vehicles in France has increased slowly, particularly since the start of the 1990s. Growth averaged 1.1% per year during 2000-2010. In 2010, there were 37.7m vehicles in France, up only 0.8% on 2009. France's housing stock has also grown slowly since 2000, at an average rate of 1.2% per year to 33.3m properties in 2010.

Related Criteria
Insurance Rating Methodology (Sept 2011)

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Competition is Strong
The non-life insurance market did not experience major changes in the number of companies in 2010. Concentration remained high, with the 10 largest non-life insurance groups representing 77% of premiums collected, although this is lower than in life.
Figure 2

Premiums and Market Share of France's 10 Largest Non-Life Insurance Groups

2010 Cova (MAAF, MMA, GMF) Groupama Sferen (MACIF, MAIF, MATMUT) AXA France Allianz France Generali France Crdit Agricole Assurances Groupe des Assurances du Crdit Mutuel CNP Aviva France Total
Source: FFSA/Fitch estimates

Premiums (EURbn) 8.7 8.5 7.5 6.9 5.7 4.5 2.1 2.0 1.8 1.2 48.9

Market share (%) 13.7 13.4 11.8 10.9 9.0 7.1 3.3 3.2 2.8 1.9 77.1

The breakdown of total premiums by distribution channel remained more or less unchanged compared with 2009, as tied agents and direct mutual insurance companies continued to dominate the market, with shares in gross premiums written of 33% and 34%, respectively. However, there are other important distribution channels, notably insurance brokers that focus on commercial lines (18% of gross premiums written), bancassurance (11%) and to a lesser extent direct insurance (2%). As a rule, the number of competing distribution channels diminishes as the complexity of the risk being insured increases; coverage of corporate risks fits this concept well. The consolidation of the sector has taken a number of different forms. Some mergers have resulted in the disappearance of insurance names (UAP in 1997 and Azur in 2007), while others have not for example, when Groupama bought GAN, the latter continued to trade under its own name. Some mutual companies have reached agreements to pool some of their resources, centralise their executive management and combine some of their activities. MAAF, MMA and GMF are cases in point. In 2003, they established a socit de groupe d'assurance mutuelle (SGAM), which combines the three partners' business positions and helps improve their efficiency. Fitch continues to believe that these forms of cooperation agreements (short of formal mergers) will become more frequent as the need for companies to find cost synergies is amplified by the difficult economic environment and stronger competition. This expectation has been met by the creation of Sferen by MACIF, MAIF and MATMUT in 2010. Fitch also notes the establishment in 2011 of a partnership agreement between medium-sized non-life insurers (Generali France, Aviva France, Thelem Assurances and Sogessur) aimed at improving the efficiency of their claims management. In addition, new competition in the non-life insurance market is emerging from low-cost products offered through the internet by large groups such as Groupama (Amaguiz), AXA (Direct Assurance) and MACIF (idmacif). Fitch believes the success of such offers is supported by the difficult economic environment and the shift of some policyholders towards less expensive and simpler non-life insurance products due to a decline in their purchasing power. The current environment of increased tariffs and the development of online comparative insurance operators (known as aggregators, which have been very successful in other countries, such as the UK) have reinforced the attractiveness of low-cost offers.

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Dynamic Bancassurance Market
Bancassurers have only been competing in the non-life insurance market since the early 1990s, and their focus has mainly been on motor and property insurance. Even so, their share of gross premiums written has increased significantly, from 4% in 1994 to 11% in 2010. Taking advantage of their knowledge of their existing banking customers, banks are able to package simple non-life insurance policies along with their financial products. All banks have, to varying degrees, expanded the scope of their operations in the non-life insurance market. However, the non-life bancassurance market remains somewhat concentrated in the hands of two players, Groupe des Assurances du Crdit Mutuel and Crdit Agricole Assurance. In 2010, these companies accounted for 76% of the non-life premiums collected by banking group subsidiaries. Fitch believes that bancassurers will continue to play a growing role in the market, especially as La Banque Postale (the wholly owned banking subsidiary of the French post office), in partnership with Groupama, has started to sell individual non-life insurance products as of 2011. La Banque Postale is well positioned to rapidly capture market share in this segment due to its access to an extensive network of 17,000 post offices and outlets, the largest in France. Its entry into the non-life insurance market should intensify an existing trend for general agents to strengthen the size of their distribution networks and capitalise on their expertise in order to remain competitive. Fitch also notes the double-digit growth posted by most non-life bancassurers in 2010.

Profitability: Cycle's Downward Swing

The French non-life insurance market is in essence cyclical, with the country's insurers facing challenges to stabilise their underwriting results. When the cycle is at its peak, the lure of market share gains generally leads insurers to pursue aggressive pricing policies and to be less selective in their risk-acceptance procedures. The consequence of this is that there tends to be a gradual deterioration in their results. This underlying trend can sometimes be affected by external factors, for example when major catastrophes occur, forcing insurers to tighten up acceptance procedures and increase tariffs, which prompts the cycle's upward swing.
Figure 3

Evolution of Net Combined Ratio

(%) 120

110

100

90

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: FFSA-GEMA, Fitch estimates

At the sector level, the development of the combined ratio has reflected the cyclical nature of the business since 1999, which is logical given the market's maturity. During 2000-2006, French non-life insurers considerably improved their technical profitability due to more stringent underwriting policies and better cost control. However, non-life insurers' technical profitability stabilised during 2006-2008 as the benign claims environment during the period, especially in motor insurance, led insurers to resume aggressive pricing policies. Since 2008, non-life insurers have reported a deteriorated net combined ratio of 104% on average, due to the deterioration of the claims environment and intense competition on tariffs. Significant climate events occurred during this period, mainly the Klaus storm in January 2009

French Non-life Insurance October 2011

2010

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(estimated cost to the insurance industry of EUR1.7bn), the Quinten storm in February (EUR200m) and hailstorms in May (more than EUR200m). In 2010, storm Xynthia cost EUR1.5bn and flooding in the Var region cost EUR0.6bn. Nevertheless, underwriting performance started to recover in 2010 as, after several years of attractive pricing policies for their policyholders, non-life insurers generally announced tariff increases. Although the magnitude of their actions remained limited in 2010, with average price increases of between 1% and 3%, Fitch estimates that measures taken by insurers are starting to materialise and should help restore their profitability, especially considering the benign claims environment experienced over the past 12 months.

Lower Asset Returns

French non-life insurers invest more heavily in shares and other variable-yielding securities than life insurers, even though they are mainly involved in shorter-tail business. This is due to the high loyalty of their policyholders who tend to renew their yearly policies several times (increasing the effective duration) and also because, unlike life insurers, non-life insurers have no obligation to guarantee a yearly minimum return to their policyholders. They therefore have greater flexibility in their asset allocation strategy, the goal being to achieve a higher return in the medium term. Non-life insurers' financial revenues increased by almost 10% in 2010 compared with 2009 to EUR6.0bn but could fall in 2011 considering the current poor performance of the equity markets and the low interest rate environment. Moreover, non-life insurers are generally invested in bonds with shorter maturities than life insurers, implying that they will suffer the negative impact of declining interest rates earlier, as reinvestments will be made at lower yields. In 2010, shares and other variable-yielding securities represented 27% of total investments held by non-life insurers compared with 29% in 2009. The prospect of Solvency II has led the majority of non-life insurers to gradually de-risk their investment portfolios, reducing their investments in risky assets in order not to be penalised in terms of capital requirements when the new rules are applied.

Market Outlook
Saturated Market: New Sources of Growth Difficult to Tap
Fitch expects the growth rate of non-life insurance premiums to remain weak in the short term, although slightly higher than in 2010. Growth continues to be constrained by fierce competition in the motor insurance market and by the economic slowdown, which is affecting premiums written in property lines. On the other side, measures taken by insurers in terms of tariff increases should have a positive impact on premium volumes written. The occurrence of a large catastrophe is typically a sufficient reason and catalyst for insurers to push up premiums. France has experienced several major natural disasters over the last 10 years or so: the storms of 1999, numerous floods in the south-eastern part of the country, the drought of 2003, the Klaus storm in 2009 and the Xynthia storm at the beginning of 2010. Since 1990, the total cost of natural disasters that have occurred in France has exceeded EUR34bn for the insurance industry, and this cost is expected to double by 2030, according to FFSA (the French association of insurance companies), partly due to the impact of climate change. Nevertheless, such sources of growth may create only limited potential for non-life insurers because the risks may be difficult to price appropriately, or may result in premium levels that are unacceptable to policyholders. When supply and demand for insurance coverage cannot reach equilibrium because the premium is unacceptably high (from the perspective of policyholders), the only real solution is for the state to step in. For example, the French state's 100%-owned reinsurance company, Caisse Centrale de Reassurance, offers non-life insurers a reinsurance scheme with unlimited

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state-guaranteed coverage for natural disasters. In medical third-party liability, measures have been taken in collaboration with the public authorities to provide a collective mechanism for spreading risks, resulting in the creation of a pool in 2003. This proved to be insufficient, with the result that a range of other options continue to be explored with the French government, although none of these looks to be the obvious solution. Non-life insurers may explore a potential source of growth in the long-term care insurance market. Around 1.2m individuals need long-term care in France, and this number is expected to double by 2040. Fitch believes that although this market presents some opportunities, uncertainties remain about the ability of insurers to price their risks appropriately in relation to the risk profile of their policyholders. After several postponements, proposals by the French government on the financing of long-term care insurance have still not been made but could occur in 2012. This may take the form of a public-private partnership. Long-term care insurance premiums reached a modest EUR394m in 2010, up 2% yoy. Fitch notes that providers of longterm care policies are generally strongly protected by reinsurance contracts, pay pre-defined lump sums instead of indemnity-type claims to their policyholders and may adjust tariffs every year, all limiting the risk on their future underwriting results.

The Particular Case of Healthcare Insurance

In 2010, claims and expenses paid by public health insurance funds (Caisses Primaires d'Assurance Maladie; CPAM) totalled EUR181bn almost three times that year's general insurance premiums total of EUR63bn. In France, primary health insurance is provided solely by the Scurit Sociale (SS), which accounts for 77% of total healthcare spending. Supplementary health cover makes up only 14%, which falls a long way short of its potential; the rest is uninsured. Despite having a monopoly, the SS has been unable to balance its books, with the deficit of the public health insurance fund widening significantly from EUR2.1bn in 2001 to an expected EUR10.3bn in 2011. The deficit is expected to slightly decrease from 2010 but remains at historically high level. Although the growth potential offered to non-life insurers may appear considerable, in practice growth is constrained by difficult-to-reverse political and social choices at the national level. The SS tariff mechanism is based on the income of the beneficiaries, which does not necessarily correlate with their risk profile. In this context, Fitch believes that healthcare insurance is potentially of interest to French insurance companies, but only at the margin, as any form of privatisation of the system would lead to major tariff changes, making access to it unaffordable for a large proportion of the population.
Figure 4

Changes in Health Expenses

(EURm) 200,000 160,000 120,000 80,000 40,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 121,700 129,500 Health expenses 156,500 163,800 Growth rate 171,600 178,000 181,000 (%) 7 6 5 4 3 2 1 0

137,900

144,900

151,200

Source: FFSA-GEMA, Fitch estimates

Moreover, in order to limit the SS deficit, the French government has implemented or increased taxes, which will be passed on to policyholders through additional tariff increases. Fitch

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believes that the French government's decision to increase taxes on supplemental health insurers reduces their growth potential in the healthcare insurance market and may encourage policyholders to subscribe to less expensive and less extensive guarantees.

Profitability Recovery: Tariff Competition Likely to Remain

At the current stage of the business cycle, Fitch does not see the potential for a significant improvement in non-life insurers' profitability and estimates that the sector's average combined ratio will remain around 100% on average in 2011 and 2012, excluding any significant natural catastrophe activity. The claims environment has remained benign for non-life insurers in 2011 so far, with no major climate events. Nevertheless, Fitch notes that, in the current environment of a slowdown of the economy, the temptation for policyholders to commit fraud has increased and less attention is given to prevention, potentially leading to an increase in the severity of claims. Deteriorating market circumstances for corporate lines (especially in motor fleets and construction) and expected continuing pressure on non-life insurers' financial results should encourage them to announce further increases in tariffs, particularly in property lines. Fitch estimates that the recovery of non-life insurers' profitability and, as a consequence, capital adequacy will depend, as for life insurers, on a substantial and sustainable improvement in financial markets and also on the extent to which insurers' tariff increases decided in 2011 will continue to be implemented and not offset by natural catastrophe major claims that may typically occur in France during the winter season.

The Cost of Bodily Injury Claims: Concerns Remain

The frequency of road accidents in France has diminished steadily since 1990, particularly since 2003, when a series of preventive measures (such as higher penalties for a range of driving offences) were adopted by the French government. However, the average cost of claims settled regarding bodily injuries caused by road accidents has increased significantly. In particular, large bodily injury claims have became more frequent, with those implying a nominal cost higher than EUR3m for non-life insurers rising by three times during 1998-2010, reflecting the upward trend in compensation awarded by the courts, and a number of subsidiary factors, such as higher medical costs and a low interest rate environment. Fitch notes that many nonlife insurers have already strengthened their technical provisions to varying degrees, although it is likely that they will have to do so again at end-2011 due to the very low interest rate environment, which implies a decline in the discount rate used by insurers to estimate their reserve adequacy. Based on a proposal by the French government in cooperation with the insurance industry, a law was unanimously voted for by French deputies in February 2009 to create a common classification for types of bodily injury. This will improve the predictability of the cost of claims for insurance companies and may reduce overpayments to certain victims. One risk for non-life insurers, however, is that the courts could be tempted to systematically award the maximum amounts specified in the common classification, which could offset any expected benefit.

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French Non-life Insurance October 2011