Moody’s outlook for the French P&C insurance sector remains negative as intense competition causes further downwards pricing pressure and investment income suffers from low interest rates.
Overall, P&C combined ratios are expected to remain at 100%, or break even, and motor insurance is forecast to remain unprofitable at the underwriting level, despite any pricing upswing.
“French P&C insurers will raise prices at a slightly faster pace than in previous years, notably in the motor segment, but the increase in prices will barely offset claims inflation because of intense competition,” said Benjamin Serra, a Vice President and Senior Credit Officer at Moody’s; “as a consequence, P&C profits will remain fragile.”
In addition, P&C insurers are expected to see further profitability deterioration due to their main source of profit, investment income, continuing to decline because of still low interest rates.
However, due to the recent rise in interest rates, insurers will not have to adjust the discount rate of their motor annuity reserves.
Moody’s outlook for the life insurance sector is stable as “the market is resilient to low interest rates” – insurers are able to pass on the impact of declining investment returns to policyholders.
Life insurers are also expected to benefit from continued increases of sales of unit-linked products and limits on sales of guaranteed products.
However, analysts warn that the traditionally more stable sector could see profitability deteriorate in coming years as rising expenses are coupled with historically weak premiums expansion.
“This partly reflects the increased competition that insurers face from banks and asset managers, which presents a strategic challenge for French insurance companies. Although insurance products currently remain competitive vis-a-vis banking and asset management products, this competition is intensifying due to low interests rates as well as the introduction of a flat tax on all savings products,” Moody’s said.
Over the long-term this could leave French insurers facing profitability challenges, if they don’t see a strategic shift to develop new savings and protection products that can’t be replicated by banks and asset managers to remain competitive.
Across the Atlantic, however, re/insurers operating in one of the world’s biggest life insurance markets, have had their sector’s outlook upgraded from negative to stable by Moody’s.
Manoj Jethani, a Moody’s Vice President, attributed this to resilience in the face of low-interest rates, as “U.S. life insurers have adapted to the low rate environment through adjustments to product design and new business strategies, and are likely to continue developing and pursuing these strategies over the outlook period.”