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In a new report from Fitch Ratings, higher-for-longer investment yields could be a pillar of strength for the French insurance sector as conditions look up. However, natural catastrophe losses and lapse risk will continue to dog at the EU’s second largest insurance market heels.
“The French insurance sector is in a good position to withstand weak macroeconomic prospects due to resilient credit fundamentals and effective management decisions,” said Manuel Arrivé, CFA, Director in the Fitch report. “However, asset risk, lapse risk in life, claims inflation and natural catastrophe risk in non-life remain key credit vulnerabilities that could be revealed in a downside scenario going beyond our base case.”
Lapse risk has been of particular concern this year and will likely continue into 2024. In September, Gallagher Re warned that the life insurance sector – and its investments – were at risk due to the recent economic volatility that could see their customers abandon them and cause a hole in their finances.
“The French insurance sector is in a good position to withstand weak macroeconomic prospects due to resilient credit fundamentals."
France and Italy were identified as the two markets where insurers were the most exposed to the risk. This was due partly to the laws in these countries that enabled consumers to withdraw from or lapse their policies with little to no financial consequences. “We expect surrenders to increase further to 6%-8% in 2024, while remaining manageable due to ample balance-sheet liquidity,” said Fitch. “[However] The risk of mass lapses adversely affecting insurers credit profiles remains remote because of the long-term sticky nature of liabilities.”
Higher-for-longer investment yields were seen as one of the key trends to watch in 2024 in the French market, and these reinvestment yields were also going to be supportive of 2024 earnings, according to the report.
This mirrored recent results from European re/insurers who had flatter results propped up by good investment returns from their portfolios in various quarters this year.
“Rising default rates or falling asset values leading, in an extreme scenario, to realisation of investment losses could erode capital buffers and earnings."
This was also seen in 2022 when the volatile markets stripped back underwriting returns, and many relied on investment returns to keep profit steady.
“Rising default rates or falling asset values leading, in an extreme scenario, to realisation of investment losses could erode capital buffers and earnings, although part of the losses can be shared with life policyholders,” said Fitch in its report on areas to watch in 2024.
Fitch revised its outlook on the French non-life sector from deteriorating to neutral to reflect the “expectation that insurers’ strong pricing and underwriting actions will mitigate claims inflation pressures and support technical margins”.
The report specified that ‘higher-for-longer’ would be key to financial stability over the year. “Higher-for-longer reinvestment yields leading to higher future investment income are also supportive of earnings,” the report said on the non-life sector.
It predicted that the non-life sector would once again be hit by elevated natural catastrophe claims. A record year in 2022 was followed by a 2023 estimated number, which was (excluding 2022) the highest since 2018.
However, the sector did have many positives to rely on, which had led to an improvement in outlook status. These included strong management and the introduction of other resilience actions. “We forecast marginally improving combined ratios, driven by improving attritional loss ratios, partially offset by higher natural catastrophe ratios,” the report said. “Flexibility in prior-year reserves releases or prudence in current-year reserving will help mitigate volatility in underwriting performance.”
"The difficulties associated with the rapid rise in inflation are likely to be a significant headwind, putting pressure on both top and bottom-line results."
In its outlook for 2024, Deloitte said the Advanced Europe, Middle East, and Africa market would see a 2.1% global non-life insurance premium growth rate in real terms in 2024.
Fitch Ratings's neutral outlook differs from others made several months ago, which painted a worse picture. In June 2023, AM Best said it was maintaining a Negative outlook on the French non-life segment, as “the difficulties associated with the rapid rise in inflation are likely to be a significant headwind, putting pressure on both top and bottom-line results over the next year”.
The rapid increase in interest rates has presented challenges and opportunities for the sector, which are likely to continue in 2024.
“Traditionally, a longer investment duration has allowed French life insurers to offer more competitive and stable crediting rates than other savings solutions,” said AM Best in their outlook on the French life market from mid-2023. “This dynamic was further boosted during the prior period of decreasing interest rates, when insurers were able to provide bonus rates supported by seasoned investments.”
It warned that while “insurers’ investment income will continue to trend higher as maturing investments are reinvested at higher yields, the increase will likely be insufficient to maintain competitive rates”.
Insurers looking to maintain premium levels may need to accept compressed margins until investment portfolio yields catch up with current yields.
Fitch warned about market conditions for 2024, as French insurers typically have a higher risky-assets/capital ratio than their European peers, “which makes them vulnerable to deterioration in credit and investment risks, despite their ability to share investment losses with policyholders”.
