Performance of the French insurance sector in 2012

Despite an unfavourable macroeconomic environment, the profitability and financial situation of French insurers improved in 2012. In non-life insurance, premiums increased at a solid pace of 3%. They were mainly fuelled by personal insurance business lines, whereas premiums from corporate business lines remained almost flat in 2012, with mixed results across lines of business. Meanwhile, the cost of claims in the 2012 accounting year (for all accident years) rose slightly more than gross earned premiums, thereby causing the total combined ratio to move slightly higher. Some lines of business were more affected than others: technical balances deteriorated in health & accident, general third-party liability and transport insurance, while combined ratios improved steadily in motor insurance, coming close to the 100% breakeven point. The improvements in financial markets compared to 2011 led to: (i) an increase in realised capital gains, allowing insurers to maintain a stable underwriting margin compared to 2011, close to 5% of gross earned premiums; (ii) a surge in unrealised capital gains resulting in improved solvency ratios across the board. Excluding unrealised capital gains, the improvement in the solvency position was more modest. In life insurance, the top 12 companies have been quite resilient to the negative effects of the financial crisis and showed higher profitability rates than one year before. The return on equity (RoE) went up to its 2009 and 2010 levels, to 8% from 5.3% in 2011 when the sector had been hit by sovereign debt write-downs. Moreover, realised gains in 2012 allowed insurers to generate more profits to be ultimately shared with policyholders, while in 2011 insurers had had to use their profit-sharing reserves in order to avoid a sharp decline in returns distributed to policyholders. Yet, the decrease in net inflows which started in the third quarter of 2011 continued during the year 2012. On the one hand, volatility in financial markets and uncertainties relating to tax regime may have driven investors away from life insurance towards short-term savings plans (e.g. “livret A” passbooks). On the other hand, the sluggish economic environment and the structural shifts due to an aging population contributed to increase redemptions and benefits paid to policyholders. The solvency position of the top 12 life insurance companies was boosted by the sharp increase in unrealised capital gains on investments (life insurance firms have large exposure to debt securities, the price of which increased sharply in 2012). Excluding unrealised capital gains, the solvency ratio went up to its 2009 level (121%) from depressed 2010 and 2011 levels. In addition to the risks that are specific to the insurance business and that require adequate provisioning, the major risk for insurance firms in the current economic environment remains the low interest rate regime which makes it difficult to provide policyholders with high returns and may give insurance companies little choice but to pile up low-yield debt securities which could expose them to an upward interest rate shock later on. It is therefore essential that life insurance firms continue to take the utmost care to prudent profit-sharing policies and guaranteed interest rates. Besides, it is important that firms continue to keep acquisition and management costs well under control.