Models of Insurance in France

Transcription

1 THEFRENCHI NSURANCEMARKETI NFI GURES

2 Contents INSURANCE 2 1 THE INSURANCE SECTOR IN 2 2 OVERALL PROFITABILITY MAINTAINED THE OVERALL INCOME STATEMENT FOR LIFE AND NON-LIFE BUSINESS HELD STEADY AS A RESULT OF INVESTMENT INCOME FUNDS FLOWED OUT OF LIFE INSURANCE IN In, premiums collected by life insurers continued to decline Strong performances for investment income offset increased claims, benefits and provisions Mathematical reserves increased slightly NON-LIFE BUSINESS: OVERALL INCREASE IN Premiums increased overall except in transport and construction insurance Claims and processing expenses increased moderately Moderate increase in investment income 16 3 BALANCE SHEET STRUCTURE IMPACTED BY THE INCREASE IN UNREALISED CAPITAL GAINS INCREASE IN THE NOMINAL VALUE OF TOTAL ASSETS INCREASE IN NON-SOVEREIGN BOND INVESTMENTS AND UNREALISED CAPITAL GAINS Investment portfolio reallocated into non-sovereign bonds Sharp increase in unrealised capital gains 20 4 REINSURANCE, AN EXPANDING BUSINESS A SMALL BUT EXPANDING MARKET, WITH A FOCUS ON NON-LIFE RISKS INTRA-GROUP REINSURANCE USED TO RATIONALISE INTERNAL RISK MANAGEMENT 24 5 AREAS TO WATCH STABLE REGULATED COMMITMENTS COVERAGE RATIO OVERALL INCREASE IN SOLVENCY HEALTH INSURANCE: A SECTOR WHERE THE BALANCE MAY CHANGE 27 APPENDICES 33 GLOSSARY 51 CONTENTS OF TABLES AND FIGURES 55

3 INSURANCE 1 The insurance sector in The concentration trend in the insurance market picked up speed in. The total number of authorised insurance entities fell from 1,074 in 2011 to 1,018 (table 1). As in previous years, the decline chiefly concerned entities governed by the Mutual Insurance Code. Competition remains fierce and is forcing entities to seek critical mass by expanding their business. Mergers are also being driven by forthcoming regulatory requirements on governance and solvency. Table 1: Insurance entities Number of insurance entities at 31/12/ at 31/12/2011 at 31/12/ Change /2011 Change / Life and composite insurers Non-life insurers Branches in third countries sub-total insurance companies Reinsurers Insurance Code Provident institutions Social Security Code Mutual Insurers Book II o/w substituted mutual insurers Mutual Insurance Code Total authorised entities and entities not requiring authorisation 1,129 1,074 1, N.B.: The total number of authorised entities or entities not requiring authorisations does not include entities that are still supervised but no longer authorised to issue contracts. European insurers operating in France under the freedom to provide services (FPS) The number of insurance companies from other Member States in the European Economic Area (EEA) authorised to do business in France under the FPS fell slightly, from 1,056 at 31 December 2011 to 1,050 at 31 December (table 2). The three countries with the largest representation are the UK, Ireland and Germany, which accounted for 22%, 12% and 9% respectively of all notifications received under the FPS. 2

4 Table 2: Number of EEA insurance companies and branches of insurance companies authorised to do business in France under the FPS at 31 December Free provision of services in France Country Notifications from insurers authorised in another EEA country and branches of insurance companies authorised to do business in the EEA under the FPS Germany Austria Belgium Bulgaria Cyprus Denmark Spain Estonia Finland Gibraltar Greece Hungary Ireland Iceland Italy Latvia Liechtenstein Lithuania Luxembourg Malta Norw ay Netherlands Poland Portugal Czech Republic Romania UK Slovakia Slovenia Sw eden TOTAL ,046 1,056 1,050 French insurers operating in the EEA under the FPS At 31 December, 1,648 notifications had been received, down some 5% on 2011 (table 3). The main countries in which French insurance companies do business under the FPS are Belgium (141), Germany (115), Spain (112) and Italy (109). 3

5 Table 3: Number of FPS notifications from French insurance companies and branches of insurance companies in the EEA at 31 December Free provision of services in the EEA Country Notifications from insurance companies authorised in France and branches of French insurance companies in the EEA 2011 Germany Austria Belgium Bulgaria Cyprus Denmark Spain Estonia Finland Gibraltar Greece Hungary Ireland Iceland Italy Latvia Liechtenstein Lithuania Luxembourg Malta Norw ay Netherlands Poland Portugal Czech Republic Romania UK Slovakia Slovenia Sw eden TOTAL 1,743 1,728 1,648 4

6 European insurers operating in France under the freedom of establishment The number of EEA companies authorised to do business in France under the freedom of establishment contracted from 101 at 31 December 2011 to 80 at 31 December (table 4). The European countries with the largest representation in France are the UK (35 branches), Germany (10 branches), Ireland (7 branches) and Luxembourg (7 branches). Some branches based in France are authorised to operate throughout the EEA under the freedom to provide services. Table 4: Number of branches established in France by EEA insurers at 31 December Branches established in France Country Notifications from insurers authorised in another EEA country Germany Belgium Denmark Spain Finland Greece Ireland Italy Liechtenstein Luxembourg Malta Norway Netherlands Portugal UK Sweden TOTAL French insurers operating in the EEA under the freedom of establishment French insurers had 105 branches in EEA countries at 31 December, compared with 113 at 31 December 2011 (table 5). The main countries where French insurers have established branches are Italy (15), Spain (14) and Germany (9). Just as some European insurers that have established themselves in France operate throughout the EEA, some branches of French firms that are established in the EEA also do business across the EEA under the freedom to provide services. 5

7 Table 5: Number of branches established in the EEA by French insurers at 31 December Branches established in the EEA Country Notifications from insurers authorised in France 2011 Germany Austria Belgium Bulgaria Denmark Spain Finland Greece Hungary Ireland Italy Latvia Liechtenstein Lithuania Luxembourg Norw ay Netherlands Poland Portugal Czech Republic Romania UK Slovakia Sw eden TOTAL

8 2 Overall profitability maintained The analysis of the situation on the French insurance market in is based primarily on detailed annual dossiers that insurers were legally required 1 to file with the Autorité de contrôle prudentiel et de résolution (ACPR) within four months of the end of the accounting year. The information gathered aggregates the parent company data of all insurance entities authorised in France to carry on an insurance business from their registered offices. 2 For the sake of comparison, the indicators calculated for 2011 aggregate all the data gathered from the 2011 annual dossiers, whereas the 2011 pro forma indicators (denoted ) show the data for 2011 based on the population. One of the main reasons for this is to provide growth rates that are more representative of broad market developments (see appendix on methodology). All the changes reported in the remainder of this document are made with reference to (pro forma). The difference between and 2011 stems partly from the conversion in of one non-life firm, which was previously authorised in France, into the branch of an entity authorised in another European country, and which no longer files an annual dossier with the ACPR. This entity continues to do insurance business in France under the FPS. Accordingly, insurance business in France cannot be considered to have been reduced by this entity s change in status. Briefing The establishment of a single market for services is one of the foundations of the European single market. In the insurance sector, this has led to the creation of two legal regimes that allow entities to do business in other EEA countries without having to create a subsidiary subject to authorisation requirements. These two regimes are set out in 3 and 4 of Article L of France s Insurance Code, as follows: The term freedom of establishment refers to the regime under which an insurance company covers a risk or assumes an undertaking located in a State from a branch located in said State. The term freedom to provide services refers to the arrangements under which a company of a Member State of the European Economic Area covers or assumes, from its registered offices or a branch located in a State party to the European Economic Area Agreement, a risk or an undertaking located in another of said States, which is referred to as the State of free provision of services. 1 2 Articles A of the Insurance Code, R of the Social Security Code and A of the Mutual Insurance Code. This report provides data on all the entities that had filed annual dossiers by 8 August In contrast, the report prepared in July 2013 on the leading life and non-life insurers (see La situation des principaux organismes d assurance en ) had a narrower scope. 7

9 2.1 The overall income statement for life and non-life business held steady as a result of investment income Overall, total life and non-life premiums received by insurance entities came to EUR billion in, down 1.3% compared with (table 6). The EUR 7.9 billion (- 5.5%) decline in life insurance premiums collected between end-2011 and end- was only partly offset by the EUR 4.7 billion (+ 4.2%) increase in non-life premiums. Despite the small contraction in turnover, the sector s overall return on equity rose from 4.8% in 2011 to 5.3% in. Table 6: Aggregate summary income statement Life Non-Life Total Premiums Claims, provisions and profit-sharing (-) o/w profit-sharing Net investment income Administrative costs (-) Reinsurance (-) Underwriting income Net investment income (non-underw riting) Other non-underw riting income or loss Net income Return on equity (net income / equity) 6.5% 5.0% 4.8% 5.3% N.B.: the "Underwriting income" and "Net income" items may not be equal to the sum of intermediate balances because of rounding. This is true for all the tables in this section. Premiums are reported gross of reinsurance: premium cessions are recorded under reinsurance with the costs booked to assuming entities, whether or not they are reinsurers. Population: all entities The upturn in profitability was driven in particular by the increase in combined underwriting income for life and non-life business, which rose from EUR 5.7 billion in 2011 to EUR 9.8 billion in (a 71.9% increase compared with ). The financial income from the underwriting result increased for all entities except non-life insurers (figure 1). Figure 1: Non-life technical underwriting result, by type of entity Life and composite insurers Non-life insurers Reinsurers Mutual insurers (Mutual Insurance Code) Provident institutions Population: all entities. 8

10 The increase in underwriting income stemmed from an increase in net investment income, which climbed from EUR 28.2 billion in 2011 to EUR 74.4 billion. Most of the growth was concentrated in life insurance, which saw a 193.7% increase compared with 2011 to EUR 69.9 billion (see table 6). Investment income is partly redistributed to policyholders (profit-sharing and interest increased from EUR 35.7 billion in 2011 to EUR 44.7 billion in ). Accordingly, total expenses including these provisions jumped from EUR billion to EUR 277 billion. Non-underwriting income also increased, but to a lesser extent, rising to EUR 3.5 billion compared with EUR 3.3 billion in Other non-underwriting income or loss showed a loss of EUR 5.6 billion, compared with a loss of EUR 2.2 billion in 2011, mainly because of higher company taxes, which more than doubled between 2011 and, owing to the increase in investment income in and new levies on insurers interest maintenance reserves. Overall, net income stood at EUR 7.7 billion, or 11.6% higher than in. 2.2 Funds flowed out of life insurance in A close examination reveals that was an unusual year for life insurance, which experienced a net annual outflow of funds for the first time ever, even as increased profit-sharing raised the level of benefits and claims paid out In, premiums collected by life insurers continued to decline Briefing: The direct business of an insurance entity corresponds to undertakings assumed from an establishment in France and with respect to which the insurer is responsible for paying claims and benefits. Accordingly, this excludes assumptions (equivalent to reinsurance) and foreign business (FPS and business of branches). Total life insurance premiums collected in came to EUR billion, down EUR 7.9 billion compared with (table 7). Life insurance premiums fell for the second year running, contracting by 5.5% compared with and 17.9% compared with. This decline was largely attributable to the EUR 11.5 billion reduction in direct business, which was not offset by the EUR 3.8 billion increase in turnover from other sources (business under the FPS, branches and assumptions in France). Table 7: Life insurance, sources of turnover Change / amount as a % Total life insurance premiums Direct business Reinsurance premiums Other (freedom to provide services, branches, assumptions in France) Population: all entities The fall in premiums within direct business affected all sectors of life insurance (figure 2), aside from occupational retirement insurance (Class 26 and PERP pensions savings plans), which gained 15.8%. 3 3 Retirement savings according to this definition account for a small portion of the life business of insurance entities, however, and are not the only option for supplementary retirement insurance in France, which also includes a range of retirement instruments, such as Madelin contracts and defined contribution or defined benefit contracts taken out by companies or individuals with insurance entities. 9

11 Briefing Class 26 schemes are points-based group retirement insurance schemes also known as L. 441 schemes, after Article L of the Insurance Code, which defines them, and June 4th schemes, after the founding legislation, which was passed on 4 June These schemes are governed by Article L of the Social Security Code if offered by provident institutions, and by Article L of the Mutual Insurance Code if offered by mutual insurers. The widespread decline in premiums was particularly pronounced in individual non unit-linked contracts (see figure 2 and appendices 1 to 5 for more details on the different categories). Although these contracts still accounted for 67.0 premiums in, their share of total premiums shrank once again, falling by 3.3 points compared with. Figure2: Life insurance premiums received through direct business, by contract type Total : Total : Total : % % -2 % Life premiums Life premiums Life premiums -8 % + 16 % Individual non unit-linked policies Individual and group unit-linked policies Group non unit-linked policies Endowment contracts Class 26 contracts and PERPs Population: all entities. Box 1: Monitoring flows of funds into life insurance shows that the pace of the net outflow slowed in The ACPR General Secretariat monitors changes in weekly premium income on surrenderable life insurance contracts at a broad sample of entities accounting for just over 80 premiums collected by insurance companies and mutual insurers on the individual life insurance market. The outflow that began in the second half of 2011 continued in (Figure 3), reaching almost EUR 6 billion in the ACPR s sample for the unit-linked and non unit-linked segments combined. As in 2011, competition from other savings products whose rates of return are now on a par with those of life insurance is one factor in the outflow of funds, as is the fact that households have shortened their investment horizons a common occurrence in times of financial uncertainty. The increase in the ceiling for Livret A and LDD passbooks in the fourth quarter of did not have a direct impact in the short-term on life insurance, leading rather to reallocations within bank savings products (see Banking section, 3.1.2). Within its sample, the ACPR noted net inflows of EUR 1.2 billion in the fourth quarter of. The share of surrenders in claims and benefits, which exceeded 75% in the fourth quarter of 2011, fell back to 70% in fourth-quarter, or close to the longterm average. 10

12 Figure 3: Total net inflows/outflows of funds into/from surrenderable life insurance contracts since 1 January of the year jan. feb. mar. apr. may jun. jul. aug. sept. oct. nov. dec. Population: sample. The net outflow seen in is the first such episode over a calendar year for several decades. It was on modest scale, however, since the outflow of funds did not exceed 0.5 mathematical reserves. 11

13 2.2.2 Strong performances for investment income offset increased claims, benefits and provisions In, claims, benefits and allocations set aside for provisions surged by 23.0% compared with to EUR billion, but were still short of their level in (table 6 and figure 4). The growth was not solely due to increased surrenders (see Contracts evolution tables in appendices 1, 2 and 3). It also reflected an increase in the profit-sharing reserve after reversals were made in 2011 to maintain profitsharing and interest allocated to contracts, which were actually lessened by capital losses that could not be absorbed by the interest maintenance reserve. Figure 4: Claims, benefits, profit-sharing and interest in total life claims and benefits Total claims and benefits o/w profit sharing and interest Population: all entities. Briefing PROFIT-SHARING The sum of profit-sharing (see below) and technical interest (see glossary). POLICYHOLDERS PARTICIPATION Investment of insurance premiums produces income referred to as technical and financial profit. Profit-sharing is a legal obligation placed on insurers (L of the Insurance Code), which are required to pay policyholders a portion of the return on investments, over and above technical interest, either immediately or at a later date. PROFIT-SHARING RESERVE (life insurance) Life insurance companies have the option of not fulfilling their statutory profit-sharing requirement immediately; they may wait up to eight years to make the payout. Instead of distributing the amount immediately, the insurer may record it in an account known as the profit-sharing reserve. INTEREST MAINTENANCE RESERVE Reserve composed of gains realised on sales of bonds and reversed in the same amount if losses are realised on assets of the same type. It is designed to mitigate loss of income generated by life insurance companies assets when interest rates fall, by preventing the payout of capital gains on sales, thereby ensuring that life insurers keep sufficient investments to honour interest rate commitments. This special reserve is considered a provision with regard to commitment coverage requirements and is one of the items that make up the solvency margin. Net investment income jumped to EUR 69.9 billion in, up from EUR 23.8 billion in (table 6), as a result of several factors. The strong performance by financial markets made it possible to reverse provisions and generate capital gains. Net investment income was also boosted by capital gains on unit-linked contracts, which are passed on to policyholders in the shape of an increased commitment by the insurer. 12

14 The increase was in evidence across all entities and in all categories, including mutual insurers and provident institutions for the types of insurance that they provide (non unit-linked and unit-linked life insurance and occupational retirement insurance, see appendices 2 and 5). The surge in investment income, combined with good control of overheads by all entities (reduction of EUR 0.2 billion between and ), led to a substantial increase in underwriting income (EUR 6.4 billion after EUR 1.9 billion in 2011) Mathematical reserves increased slightly Outstanding mathematical reserves totalled EUR 1,495.8 billion at 31 December, after EUR 1,450.2 billion at end-. This 3.1% increase (after no change in 2011) was notably due to investment income allocated to policyholders, which partly offset the outflow of funds. In non unit-linked contracts, the increase remained moderate, at around 2.2%. In unit-linked contracts, where the policyholder bears the financial risk, reserves rose by 9.0% and slightly exceeded their level in, owing to resilient financial markets in. An analysis of the long-run change in mathematical reserves, which is available only for entities governed by the Insurance Code (figure 5), reveals: - a downturn in 2011 that continued in, following a steady rise in reserves for non unit-linked contracts since the late 1980s; - a more uneven pattern in the reserves of unit-linked contracts, which fell in 2008 and 2011 before rising again in, but without returning to levels seen in 2006 and Figure 5: Mathematical reserves 1,600 1,400 1,200 1, Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jul 05 Jul 05 Jul 05 Jul 05 Mathematical reserves - unit-linked policies Mathematical reserves - non unit-linked policies ,058 1,142 1,182 1,208 Population: entities covered by the Insurance Code, except reinsurers. 2.3 Non-life business: overall increase in Premiums increased overall except in transport and construction insurance In, total premiums collected in non-life insurance came to EUR billion, after EUR billion in, a rise of 4.2%. The increase was observed in direct business as well as among reinsurers and via other channels (table 8). 13

15 Table 8: Non-life insurance, sources of earned premiums Change / amount as a % Total non-life premiums Direct business Reinsurance premiums Other (freedom to provide services, branches, assumptions in France) Population: all entities Within direct business, earned premiums in transport and construction insurance declined by 8% and 3% respectively amid slack economic conditions for both sectors (figure 6). By contrast, premiums were up 3% in the motor sector, which remains the leader in non-life insurance, and 5% in property insurance. Figure 6: Non-life insurance premiums, earned through direct business, by sector % % % + 5% + 6% -8 % -3 % +1 % 0 Motor Property Third party liability Natural disaster Other Transport Construction Credit insurance and surety bonding N.B.: rates of change for are relative to. Population: all entities excluding casualty insurance. 14

16 2.3.2 Claims and processing expenses increased moderately In, claims expenses reached EUR 91.2 billion, after EUR 87.3 billion in, an increase of 4.4% (table 6). Claims accounted for a slightly higher proportion of premiums than in the previous year, with the overall claims to premiums ratio standing at 79.9% in, after 79.2% pour. This was notably attributable to casualty insurance, the number-one category, whose ratio climbed two percentage points, see figure 7. Property insurance, both individual and professional 4 also saw a deterioration, with the loss ratio rising overall because of several factors (and despite the absence of a major natural disaster): cold weather in the first two weeks of February prompted some costly claims; theft-related claims increased; the real cost (average cost per claim relative to overall inflation) of property damage repairs rose (e.g. in the motor sector). 5 BRIEFING The ratio of claims to premiums, which applies to non-life business, is the ratio between the cost of known claims and premiums earned for the same insurance contract or sector. When measured by year of occurrence, it provides a good measure of the loss ratio of insurers. Figure 7: Ratio of claims to premiums, by year of occurrence 6 140% 121% 120% 112%112% 110% 100% 102% 93% 95% 80% 81% 83% 77% 82% 80% 80% 81% 83% 77% 72% 69% 74% 71% 67% 68% 79% 79% 81% 59% 59% 56% 80% 79% 80% Quartile 3 -Average -Median 60% 50% Quartile 1 40% 29% 20% 0% Casualty Motor liability Motor (excl. liability) Individual property Professional an d agricultural property Third party liability Natural disaster Other Transport Construction (liability and property) Total N.B.: ratios are measured based on C10 schedules, i.e. by year of occurrence, for all sectors except transport and construction (liability and property), where the ratios are derived from C12 schedules, i.e. by the year in which the contract was taken out. Population: all entities, excludinginstitutions with non-significant ratios (business in run-off mode, etc.) On the whole, combined ratios, which include the impact of overheads, 7 also showed a slight deterioration, particularly in the casualty insurance sector, where they rose by two points between and (figure 8). 4 Including agricultural. 5 The average cost of a claim in the individual and professional property sectors increased by 12.6% and 4.9% respectively between and. 6 In certain categories, taking a broader scope changes the view as compared with that published in Analyses et Synthèses, No. 19, La situation des principaux organismes d assurance en. The diverse population of firms in these sectors and the relatively large proportion of claims to overall premium volumes are the reasons for this. 7 Overheads stood at EUR 24 billion in, after EUR 22.5 billion in, an increase of 6.7%. 15

17 There was an especially pronounced deterioration in individual property and transport. As in 2011, the natural disaster sector had a low ratio of 69%, reflecting the fact that there were no major disasters, unlike in. Looking beyond these annual patterns, there are a few sectors in which premiums received are insufficient to cover the loss ratio and processing costs. In, just three sectors had average combined ratios of more than 100%: motor (101.6%), casualty (100.1%) and individual property (101.3%). These sectors therefore depend heavily on their investment returns to generate positive results. BRIEFING The combined ratio is the technical ratio for non-life insurance activities for a given year. It is obtained by dividing the cost of claims and overheads by net premiums (or contributions) earned. This ratio can be used to measure an insurer s overall performance taking account of the loss ratio and processing costs. If the ratio is over 100%, then the cost of claims and associated processing expenses exceed premiums (or contributions), and insurers have to cover the technical deficit with financial profits. Figure 8: Combined ratios, by sector 140% 125% 120% 100% 80% 101% 106% 101% 103% 104%102% 98% 100% 94% 87% 86% 86% 96% 84% 86% 69% 63% 85% 88% 88% 75% 78% 89% 101%102% 97% 101% 96% 98% Quartile 3 -Average -Median 60% Quartile 1 40% 20% 0% Casualty Motor Individual property Professional and agricultural property Third party liability Natural disaster Other Transport Construction (liability and property) Total Population: all entities, excluding institutions with non-significant ratios (business in run-off mode, etc.) Moderate increase in investment income Investment income in non-life insurance was up just EUR 0.2 billion to EUR4.5 billion in (see table 6), owing to investment costs borne by several entities belonging to the same group. Restating the investment income of nonlife insurance to exclude these entities, investment costs are more than halved in and the investment income of non-life insurers is virtually the same as it was in the previous year. All in all, despite the rise in premiums between and, higher loss ratios and processing expenses coupled with flat investment income meant that underwriting income fell by 12.8% to EUR 3.4 billion. 16

18 3 Balance sheet structure impacted by the increase in unrealised capital gains 3.1 Increase in the nominal value of total assets The aggregate total assets for the insurance sector came to EUR 2,068.8 billion at end- at book value, or 3.7% higher than in (see table 9). On the liabilities side, provisions for life insurance (excluding unit-linked contracts) and non-life insurance totalled EUR 1,522.0 billion, an increase of 2.7%. Strong performances by financial markets contributed to a substantial increase in provisions representing life insurance obligations in relation to unit-linked contracts, which rose by 9% to EUR billion. On the assets side, insurers investments, a large portion of which cover their obligations, followed a similar pattern. Investments excluding unit-linked contracts rose by 2.9% to EUR 1,616.5 billion, while investments corresponding to unit-linked contracts increased by EUR 18.3 billion in a year to reach EUR billion. The healthy state of financial markets was also reflected in the balance sheet as measured at market value, with unrealised capital gains amounting to EUR billion, up EUR billion compared with. Unrealised capital gains now account for 10.4 provisions (excl. unit-linked). Accordingly, aggregate total assets at market value amounted to EUR 2,226.5 billion, an increase of 10.4% compared with. Table 9: Aggregate balance sheet of insurance entities summary EUR billion Population: all entities. Assets Reinsurers Investments 1, , , , ,616.5 Unit-linked investments Other assets Total assets 1, , , , ,068.8 Liabilities Equity Provisions ,522.0 Unit-linked provisions Other liabilities Total liabilities 1, , , , ,068.8 Unrealised gains Total assets at market value 1, , , , ,226.5 Briefing The Provisions item represents insurers obligations towards policyholders. It provides an assessment of the future cost of claims and benefits to be paid to policyholders. 17

19 Figure 9 below offers a different view on the balance sheets of different insurer categories. For each one and for each year, it shows balance sheet items as a percentage of the book value of assets. By its construction, this approach makes it possible to observe the change in relative unrealised capital gains on assets for each type of insurance entity, with the exception of those covering unit-linked provisions (unit-linked investments are recorded at market value, whereas non unit-linked investments are booked at historical cost). This reveals that life and composite insurers generated capital gains again in, after recording small capital losses in Other entities saw a similar improvement, especially mutual insurers and provident institutions. The increase in unrealised capital gains stemmed essentially from the sharp increase in the market value of bond investments in thanks to falling interest rates. 8 Figure 9: Composition of assets, by insurer type 120% Life and composite insurers Non-life insurers Mutual insurers (Mutual Insurance Code) Provident institutions Reinsurers Overall 100% 80% 60% 40% 20% 0% Reinsurers Investments excluding unit-linked Unit-linked investments Other assets Unrealised capital gains or losses N.B.: by construction, the sumof asset items (reinsurers, investments excluding unit-linked, unit-linked investments, other assets) amounts to 100 the book value of total assets. Adding unrealised capital gains (or subtracting unrealised capital losses) therefore gives the market value of total assets. Population: all entities. A decomposition of liabilities, once again as a ratio of the total balance sheet at book value, clearly illustrates the wide spread in proportions of capital by legal form, reflecting the types of transactions undertaken by different entities (figure 10). The larger proportion of capital among non-life insurers and reinsurers, for example, reflects safety margins for obligations whose measurement is subject to uncertainty. The distribution between life and non-life insurance provisions is specific to each category of insurer and reflects their life and non-life business. Life insurance provisions amounted to 49.1 the liabilities of mutual insurers in (up 4.2 points compared with ) and 31.8 the liabilities of provident institutions (increase of threetenths of a point on ). In contrast, over the last three years, life insurance provisions of reinsurers (26.4 liabilities in ) have gone down, while provisions for claims have risen (+ 2.4 points between and ). The long-term nature of life insurance obligations means that the provisions set aside for them represent a large share of provisions relative to premiums: life premiums account for just 11.1 total premiums collected by mutual insurers, 23.9 premiums collected by provident institutions, and 26.6 reinsurers premiums. 8 Figure 11 offers an illustration of this for entities covered by the Insurance Code. 18

20 Figure 10: Composition of liabilities, by insurer type 100% Life and composite insurers Non-life insurers Mutual insurers (Mutual Insurance Code) Provident institutions Reinsurers Overall 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Equity Life insurance provisions Provisions for claims Provisions for profit-sharing Miscellaneous provisions Unit-linked provisions Other liabilities Population: all entities Across the entire population of entities governed by the Insurance Code, forward financial instruments had a market value of EUR 7.5 billion, equivalent to 0.4 the aggregate total assets of these entities. The proportion varies from 0.1% for life and composite insurers to 6.7% for reinsurers and 0.6% for non-life insurance companies. Off-balance sheet commitments accounted for an average of 13.6 the total assets of entities governed by the Insurance Code. They are heavily concentrated with a few entities that do business in guarantees and surety bonding. 3.2 Increase in non-sovereign bond investments and unrealised capital gains Investment portfolio reallocated into non-sovereign bonds The outstanding investments of entities governed by the Insurance Code 9 rose by around 4% in (table 10.a), driven mainly by the increase in bond investments (+ 4%), which accounted for just over two-thirds of the total (see figure 10 b pie chart), and by the increase in unit-linked investments (+ 9%). For bond investments, OECD sovereign securities saw a 1% decline owing to disposals of bonds issued by peripheral euro area governments (Spain, Greece, Ireland, Italy and Portugal). Monthly data collected by the ACPR on the investments of the 12 main life insurers 10 reveals that they cut their exposure to the sovereign securities of these countries by 30% in (approximately EUR 23 billion). Meanwhile, the yields on securities issued by other governments fell owing to the flight to quality, with the yield on the French benchmark ten-year bond temporarily declining to 2.1% 11 in July, from 4.8% in July Insurance entities therefore directed their investments towards non-sovereign bonds earning a better return. 12 As a result, this asset class saw a 7% increase over. Outstandings associated with unit-linked funds benefited as stockmarkets gained ground (in France, for example, the CAC 40 index put on 15% in ), both directly, through their change in value, but also indirectly, as these 9 In this section of the report, entity governed by the Insurance Code means all entities governed by the Insurance Code no matter whether they are active in life or non-life insurance. The data on provident institutions and mutual insurers governed by the Mutual Insurance Code are not consistently available. 10 La collecte et les placements des 12 principaux assureurs vie à fin décembre, Autorité de contrôle prudentiel, Analyses et Synthèses, No. 12, June Source: Banque de France. 12 Situation des principaux organismes d assurance en, Autorité de contrôle prudentiel, Analyses et Synthèses, No. 19, July

21 funds gained renewed appeal for retail investors in a setting of low long-term interest rates (which curtail the return on non unit-linked funds). Figure 10: Structure of investments by companies governed by the Insurance Code (book value) a) EUR billion b) As a percentage of total investments 2011 Change / All investments 1, , , % Equities and funds % Bonds 1, , , % Property % Unit-linked % Other (loans and deposited funds) % 3% 13% 3% 12% 69% Equities and funds Bonds Property Unit-linked o/w OECD sovereign bonds % o/w other bonds % share of OECD sovereigns in bonds 41.5% 41.3% 39.4% -1,9 pp Other (loans and deposited funds) Population: entities governed by the Insurance Code Sharp increase in unrealised capital gains While the markets remained under heavy strain until the start of the second half of (Greek default in March, Spain s request for EUR 100 billion in assistance and nationalisation of Spanish banks in May/June, Greek elections in June), steps taken by the ECB, including the speech by President Mario Draghi on 26 July and the OMT 13 programme announced in September, followed by progress towards the establishment of a unified supervisory mechanism subsequently restored calm and dispelled the doubts hanging over the euro area. The first half was therefore favourable to highly rated sovereign securities, which benefited from the safe haven effect, while the ECB s interventions in the second half had the effect of significantly lowering bond yields for the riskiest borrowers while simultaneously stimulating equity markets. The combination of these three movements drove the increase in unrealised capital gains on sovereign and non-sovereign bonds and on equities. Unrealised capital gains were unchanged in the property segment. Overall, unrealised capital gains at companies governed by the Insurance Code totalled EUR 142 billion in, representing a large increase compared with 2011 and the highest level since 2009 (figure 11). 13 Outright Monetary Transactions. 20

22 Figure 11: Unrealised capital gains, by asset class Sovereigns Other bonds Equities and funds Property Other (unit-linked investments, loans, deposits) Total Population: entities governed by the Insurance Code. 21

23 4 Reinsurance, an expanding business BRIEFING Reinsurance is a technique whereby an insurer transfers all or part of the risks it has underwritten to another insurer. Article 2(1) of Directive 2005/68/EC gives a precise definition of reinsurance: activity consisting in accepting risks ceded by an insurance undertaking or by another reinsurance undertaking. From a business point of view, reinsurance enables insurance companies to more effectively diversify their risks and accept a higher proportion of risks relative to their capital. This form of cover is legally represented by a contract traditionally known as a reinsurance treaty. In return for payment, a reinsurer, known as the transferee, commits to reimburse an insurer, known as the cedant, under stated conditions for all or part of amounts due or to be paid by the insurer to the insured in the event of a claim. The original insurer always remains solely liable to the insured (Art. L of the Insurance Code). The premiums cession rate represents the ratio of premiums ceded to net premiums earned by insurers. 4.1 A small but expanding market, with a focus on non-life risks The reinsurance market, measured by ceded premiums (including intragroup cessions), totalled EUR 32 billion at end-, or approximately 13 the total gross premiums 14 of insurance entities (figure 12.a). Non-life insurance was the sector that made the most use of reinsurance. While reinsurance is modestly sized compared with insurance business generally, it is nonetheless increasing while the overall market shrinks. Ceded premiums were up 8.8% over, while gross premiums for all entities contracted by 1.6%. Figure 12: Reinsurance assumptions and cessions and structure of ceded premiums a) Gross premiums, assumed premiums and ceded b) Distribution of premiums ceded in premiums Gross premiums Assumptions Cessions N.B.: Gross premiums do not include reinsurance but are net of unearned premiums. Population: all entities. The increase encompassed life and non-life business. In the life insurance sector, the increase was evident in most categories of entity, as revealed by the change in cession rates since (see figure 13). The situation was more diverse in the non-life sector, where reinsurers are short of the cession levels seen in. 14 Gross premiums excluding reinsurance but net of unearned premiums. 22

24 Figure 13: Cession rates, by legal form a) Life insurance Total 7.9% Reinsurers 16.1% Mutual insurers (Mutual Insurance Code) 15.7% Provident institutions 24.7% Life and composite insurers 7.1% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2011 b) Non-life insurance Total 18.4% Reinsurers 32.2% Mutual insurers (Mutual Insurance Code) 15.1% Provident institutions 39.2% Non-life insurers 16.7% Life and composite insurers 18.7% 0% 5% 10% 15% 20% 25% 30% 35% 40% Population: all entities. N.B.: cession rates shown are those of Non-life insurance the traditional area for reinsurance accounts for some two-thirds of the total value of ceded premiums and on average has much higher cession rates than those seen among life insurance entities (18.4% compared with 7.9%, see figure 13). More than in life insurance, certain non-life sectors are more likely to face large-scale, low-frequency risks (e.g. the natural disaster sector). This type of risk, which has the potential to generate spikes in loss ratios, leads to greater use of reinsurance. Accordingly, within non-life insurance, there are differences between sectors (Figure 14). While the cession rate in the natural disaster sector was 57.4% in, it was just 8.6% in the motor sector, whose more frequent but smaller claims lend themselves well to a statistical approach. 23

25 Figure 14: Cession rates in a selection of non-life sectors Individual casualty 9.9% Group casualty 26.6% Motor Individual property 8.6% 11.0% Professional property 23.9% Natural disasters 57.4% General third party liability 17.8% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Population: all entities. N.B.: cession rates shown are those of By limiting the risks borne, reinsurance allows the cedant to improve its solvency ratio and optimise its capital requirement, 15 within the limits set by current regulations. With the entry into force of Solvency II, the impact of risk mitigation techniques provided through reinsurance will be fully recognised in the measurement of margin requirements. 16 BRIEFING Assumption is a transaction whereby a reinsurer (or insurer) agrees to cover a portion of a risk taken on by a primary insurer, whereas cession is a transaction whereby an insurer (the cedant) transfers a portion of its risk to a reinsurer. Because of international transactions, total assumptions and cessions in France do not match. 4.2 Intra-group reinsurance used to rationalise internal risk management Table 11below shows reinsurance transactions ceded by French entities in. 17 They are broken out according to whether they were ceded to a group entity or not. Internal cessions (i.e. to group entities) accounted for 41.1 the total EUR 32 billion in premiums ceded through reinsurance (see table 11). This substantial transfer of risk within groups reflects a desire to centralise risk management to capitalise on a pooling effect. It also enables groups to cut operating costs and increase bargaining power with reinsurers. 15 Analyse du risque de contrepartie de la réassurance pour les assureurs français, Autorité de contrôle prudentiel et de résolution, Débats économiques et financiers, April Provided that credit risk and other risks inherent in the use of these techniques are also adequately recognised. 17 Article A of the Insurance Code (schedule C3). 24

26 Table 11: Distribution by counterparty of reinsurance cessions, insurance entities authorised in France (as a the total) Reporting entity Group entity Counterparty Other entity Total amount Population: all entities. Total cessions 41.1% 58.9% 32.0 Life and composite insurers 44.6% 55.4% 11.2 Non-life insurers 46.8% 53.2% 11.6 Mutual insurers (Mutual Insurance Code) 47.7% 52.3% 2.7 Provident institutions 2.3% 97.7% 3.4 Reinsurers 43.7% 56.3%

27 5 Areas to watch 5.1 Stable regulated commitments coverage ratio Under the regulations, regulated commitments must at all times be covered by equivalent assets, 18 meaning that the coverage ratio must be over 100%. Merely having a balanced account because capital is positive does not necessarily mean the requirement has been met, because only certain assets are acceptable. Accordingly, this is a rule that entities and the supervisor alike must watch closely. In, the coverage ratio among life and composite insurers deteriorated slightly, falling from 104.0% to 103.9% (see table 12). This was because despite net outflows, outstanding amounts in contracts continued to rise, notably because of profit-sharing and interest allocated to policyholders. Table 12: Coverage ratio of regulated commitments (as a %) Population: all entities. Average 25th percentile Median 75th percentile Average 2011 Average Life and composite insurers Non-life insurers Mutual insurers n.a. n.a. n.a Provident institutions BRIEFING The coverage ratio of regulated commitments can be expressed as assets held in respect of regulated commitments. The Insurance Code, the Mutual Insurance Code and the Social Security Code set out the list of securities and other assets accepted to cover regulated commitments. The list includes five main classes: bonds, equities, property, loans and deposits. Investments accepted to cover regulated commitments cannot exceed 65% for equities, 40% for property assets and 10% for loans. Moreover, to split risk, investments must also comply with the following requirements: no more than 5 regulated commitments may be concentrated in securities issued by the same company (equities, bonds or loans); this 5% limit is raised to 10% provided that the total does not exceed 40 all investments accepted to cover these commitments. Regulated commitments correspond to technical provisions and other preferred debts (mortgages, deposits received to be returned, supplementary employee pensions, tax and social security debts). 5.2 Overall increase in solvency Not including unrealised capital gains in the solvency margin coverage ratio, the average situation improved for all entities except non-life insurers between 2011 and. Despite a slight decline, though, coverage levels for nonlife insurers remain well above the regulatory requirements. 18 Articles R of the Insurance Code, R of the Mutual Insurance Code and R of the Social Security Code. 26