Fitch Ratings’ deteriorating outlook for the French insurance non-life sector reflects expectation that credit fundamentals will worsen in the next 12 months.
Fitch expect lower earnings for the segment, driven by lower technical profitability, partly offset by better investment income.
Rising claims and reinsurance costs due to a persistent high inflation environment and climate change will erode underwriting margins, particularly in retail property and casualty (P&C), where pricing dynamics are less favourable than in commercial P&C and health.
French non-life insurers have historically had a prudent approach in setting reserves and are well diversified by business lines, so we expect overall reserves buffers to remain robust.
Fitch Ratings estimate that the operating profits of French insurers increased by around 3% in 2022, despite broadly flat premium income.
Rising claims and reinsurance costs due to persistent high inflation and climate change will erode underwriting margins, particularly in retail property and casualty (P&C), where pricing dynamics are less favourable than in commercial P&C.
Government intervention and legislative changes remain key risks in the health and protection segment.
The diverging dynamics between the life and non-life segments highlight the benefits of the sector’s diversified business model.
Strong growth in life operating earnings reflects higher technical margins, due to higher rates supporting the release of provisions.
Net outflows on traditional savings products (fonds euros) accelerated in 2022, but the effect on financial performance was contained, as earnings are based on a resilient stock of contracts.
Fonds euros were a drag on life premiums, while unit-linked sales proved more resilient, representing a stable 40% of premiums.
Higher reinvestment yields significantly improved new business margins. However, yields on the in-force portfolio were mostly unchanged due to the dilutive – but diminishing – effect of fonds euros net outflows in 2022.
Unit-linked fees proved resilient, as increased volumes broadly offset negative market effects.
The P&C combined ratio deteriorated for most French insurers, primarily driven by claims inflation exceeding price increases and higher natural events, although this was partly offset by favourable prior-year reserve developments.
Effective reinsurance protection shielded insurers from larger weather-related losses. Reserving levels were often increased to account for higher inflation.
Lower assets under management could also reduce unit-linked (UL) management fees. Recessionary risks will put pressure on sales volumes and, combined with higher rates, will lead to rising albeit manageable surrenders.
The long-term value proposition of traditional products (Fonds Euros) and higher crediting rates releasing profit sharing reserves are key mitigants to lapse risk.