A.M. Best Special Report: French Life Insurers Increase Prudency Amidst Taxing Market Conditions
Charlotte Vigier, senior financial analyst, said: “The life market has experienced shrinking returns in recent years, primarily stemming from the very low interest rate environment, which continues to squeeze earnings. In the hunt for higher yields, policyholders have shifted their investment appetite toward unit-linked products. Policyholders may also have deferred their investment decisions, as they await the outcome of presidential elections in May 2017 in order to better understand the impact on life products of any legislation changes and tax incentives.”
A.M. Best’s new special report, titled, “French Life Insurers Increase Prudency Amidst Taxing Market Conditions,” states that the low interest rate environment is maintaining pressure on bonuses. Whilst insurers have become more conservative in their profit-sharing strategies, with bonuses decreasing to below 2% for the first time, the ongoing low interest rate environment is expected to continue to erode investment margins, which will lead to further reductions in the yields of traditional life savings products.
Ghislain Le Cam, director, said: “Over the last few years, the French life sector has been adapting to the low interest rate environment by optimising its profit-sharing strategy, reducing bonus rates on traditional savings products, and actively diversifying its business mix by increasing its unit-linked product offering and protection businesses, which are less capital intensive and less sensitive to interest rates. With a nominal decrease of 50 basis points on average, all market participants appear to have reduced their bonus rates for traditional savings products for 2016. Bancassurers, in particular, seem to have been more aggressive in cutting back their bonuses – often to below 0.5% – reflecting their stronger market shares and solid business positions.”
Going forward, A.M. Best believes that the operating environment will remain challenging for French life insurers. Intense competition between market participants, coupled with low interest rates, will continue to place pressure on the sector’s operating performance. At this stage though, A.M. Best does not expect to take any rating actions, as insurers continue to focus on technical discipline. Insurers are likely to reduce bonus rates credited to their euro-denominated contracts further over the next year as profit margins continue to decrease. Some market participants also may be tempted to increase the risk profile of their assets to enhance their investment return, which could place pressure on their risk-adjusted capitalisation.
To access a complimentary copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=260021.
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