The French life insurance sector’s rating has been revised to negative from stable by Fitch Ratings. A negative sector outlook indicates that the agency believes that a material portion of life insurer ratings could be downgraded as they are reviewed over the next 12-24 months.
The French life sector showed some resilience in 2010. However, the challenging interest rate environment and unfavourable business mix will continue to penalise life insurers’ profitability and solvency.
Fitch expects net collections (i.e. premiums – claims paid – surrenders) to materially decrease in 2011-2012 due to lower premiums and higher lapses, which indicates that the market is becoming increasingly mature.
Margins on euro-denominated products are weak, mainly due to the low interest rate environment, which should lead the majority of life insurers to further reduce returns offered to policyholders. The business mix is becoming unfavourable, as financial market volatility is putting pressure on sales of unit-linked (UL) policies, which typically generate high margins in France.
Capital adequacy is also being affected by unfavourable trends in Southern European government bonds, although exposure is not spread equally over the sector.
The rating outlook could be revised to stable if higher asset returns, especially interest rate, would allow insurers to rebuild margins and, as such, possibly improve retained earnings.
Source : Fitch Ratings
