The French reinsurance market has experienced difficult times in recent years, but the tough choices made by some of the region's key players sees the market's strength returning, says Kaveri Niththyananthan

As far as strengthening their domestic position is concerned, French re/insurers have not had an easy time of it recently. In the late 1990s, a wave of consolidation forced many French reinsurers to withdraw from the markets. Then the after-effects of September 11, 2001 raised the spectre of starvation on many balance sheets. In 2002, while already in the throes of poor equity markets, reinsurers were also faced with a series of natural and man-made disasters in France. They spent 2003 attempting to get back on their feet, apparently with some success, since despite severe floods hitting the south of France at the beginning of 2004, progress appears to be firmly rooted.

On the regulatory front, there was also consolidation, when, in June 2004, the three supervisory authorities governing insurance companies, mutuals and Institutions de Prevoyance were merged under the name Commission de controle commune aux enterprises d'assurance, aux mutuelles et aux institutions de prevoyance (CCAMIP). There is the further suggestion that the banking supervisory body may be merged with this insurance supervisory body, but this idea has barely got off the ground.

There is also a possible development in the vexed area of litigation, with talk of creating a class action system in France as a means of controlling the inflation of indemnities awarded by courts, the high level of which is increasing the cost of liability claims. A plan to determine the level of indemnification is off the ground, but the exact timing as to when it may come into effect is uncertain.

When it comes to current initiatives in the European Union, the EU Reinsurance Directive has recently been approved by the European Parliament. France and other countries had raised concerns about the removal of collaterisation requirements for reinsurers inside the European Union, which is an integral part of the harmonisation of EU reinsurance regulation which the directive is designed to achieve. For the past four years, the Commission de Controle des Assurances has taken the attitude that reinsurers need to post collateral, and views the 24 months within which Member States must drop collateral requirements once the directive is adopted with some consternation, although a compromise has been reached which will provide an additional 12-month period to achieve the removal of collateral requirements.

Where there is decline there is also growth

Growth of market share in the non-life market is considered to be relatively stable. To date it is not, however, being derived from an expansion into new business lines, but has mainly been driven by an increase in premiums in certain areas, while claims have remained low due to few natural catastrophes.

Nevertheless, some areas have experienced declines in rates, as Michael Huttner, analyst at JPMorgan Securities, explains, "The French insurance market has seen industrial risk decline due to the price wars it has experienced, with rates having fallen on average between 15%-25%." Commenting on personal lines, he adds, "Auto lines rates are falling marginally, by roughly 1% or 2%, and on the homeowners' side, rates are flat with slight volume increases. In terms of earnings, these trends translate into strong earnings, as industrial risk tends to be reinsurered rather than remain on the balance sheet of the insurered companies. Thus we expect to see combined ratios of 99%-100%, which is encouraging for France."

By way of contrast, the life market saw healthy growth figures of 12% for the quarter ending 31 March 2005. There was even greater growth in certain niche products, as Huttner points out. "There was 30-40% growth with unit-linked products, although it is not quite clear if the recovery of the equities market drove this."

Eric Dupont, partner and Insurance leader in France at PricewaterhouseCoopers comments, "The life market has been surprising. People claim it is difficult for growth rates to continue increasing at such rates, because if they do, it will reach the stage where the only financial asset French people will have, will be insurance." The French are well known to be risk-adverse, and already contribute two-thirds of their savings to life insurance. Now, with the sustainability of the current level of pensions appearing in doubt, many are looking to insurance as a method to supplement their retirement income. The opportunities for further market share growth in this area are predicated on the fact that the system is compulsory, rights have not being capitalised, and, to some extent, the state is withdrawing from the market.

But it is not all plain sailing. Insurers face increased competition from banks, who have the added ability to cross-sell several different products. Dupont explains, "Bancassurers have always been successful in France, with bankers taking 50%-55% of the life insurance market. The main concern here is around the launch of the new individual retirement product, Plan d'epargne retraite populaire (PERP). This has certain tax incentives, and is where banks have taken more than their expected market share. Banks are also trying to develop their non-life business in motor and home, with growth increasing rapidly. Though smaller than the market share they hold in life, looking at previous trends, it could simply be a matter of time before they achieve a similarly greater presence."

A slice of gateau?

Two of the most dominant international reinsurers currently in the French market are:

- Munich Re - with gross premiums written in France of EUR351m in 2004. This compares to EUR20,571m for the entire group, after eliminating intra-Group reinsurance;

- Swiss Re - with gross premiums written in France of SF1,128m in 2004, (SF67m life and SF1,061m non-life) compared to a total of SF31,732m.

However, Ben Cohen, European reinsurance analyst at UBS notes, "One aspect of the French reinsurance market is the increased amount of business being written by the Bermudians, who have been gaining market share in recent years, because of increased marketing, stronger balance sheets, and problems at SCOR and Converium."

One of the biggest changes in the French market has been the relative decline of SCOR, which continues to experience dropping premiums. Investment losses and reserve increases for business written in the late 1990s and 9/11 depleted the reinsurer's capital in both 2001 and 2002. Although they are now in a reasonable position, life has been difficult for the reinsurer, which competes in a ratings'-sensitive market.

The downgrade of its ratings by AM Best to "B ", Moody's to "Baa2" and S&P to "BBB+", has allowed the likes of Swiss Re to prey on the insecurities of insurers, and write more business. Bermudian-owned reinsurer XL Re Europe quotes France as its largest market in Europe. Werner Skrzynski, chief executive officer of XL Re Europe, says, "We have also raised our profile in engineering, which is very long tail, especially in France with 'Decennale'. There are only a handful of players, and with the destabilisation of SCOR's rating, some buyers have believed it was the right time to diversify, which has allowed XL to step into the arena."

SCOR has now embarked on its "Moving Forward Plan", covering the period from mid-2004 to 2007. It is in a recovery phase, with premiums expected to decline further, but with margins expected to recover. The question mark over SCOR concerns the risk it has on its own books. Its combined ratio is expected to fall further in 2005, and this is mainly due to less reserving on prior years with modest cost control. SCOR has been reserving more aggressively, reserving at one point in 2004 for a loss of 20 cents on every dollar, a sign it is storing up profits for the future.

S&P states in its "Industry Report Card: European Insurance", published in April, that the ratings may be raised if SCOR generates consistent underwriting profits throughout the cycle, successfully reconfigures its cost base without damaging its franchise, and also negotiates an agreement to buy out the minority shareholder in its Irish subsidiary, Irish Reinsurance Partners (IRP). Agreements made in December 2001 permit "minority shareholders to exit IRP during the first half of 2005, and in any event no later than May 31, 2006." With SCOR having the option of buying back 49% of the Irish subsidiary, some expect them to pay at least 60% with shares, which would please ratings agencies. SCOR would like to return to "A"-level as soon as possible and, should they pay with shares, could see a ratings upgrade as soon as the next renewal season in September.

For Q1 2005, SCOR reported a drop in gross premiums written of 14% to EUR621m and a net income of EUR32.8m. At the end of 2004, it showed net profit of EUR68.7m, despite the EUR20m reserve boost following the decision that, for insurance purposes, the destruction of the World Trade Centre had been two events rather than one.

The group also showed strength during its April 2005 renewal season in Asia, a target area under the "Moving Forward Plan" in deploying capital. In Japan, expected premiums increased 3.1% to EUR46m (excluding foreign exchange impact). The group was awarded a licence in Korea in 2004 and expanded its presence in India, where it expects a 20% increase in premiums this year. Having applied for a licence in China to reinforce and develop its non-life business, it hopes to gain one as early as 2005.

SCOR Vie, SCOR's life reinsurance segment and the jewel in its crown, has helped the overall figures, reporting GPW of EUR265m for Q1 2005, compared to EUR331m for Q1 2004. It was described by S&P following the 2004 annual results as "remaining stable year on year at EUR47m (2003: EUR50m), demonstrating the quality of earnings that SCOR continues to derive in this segment."

The situation as regards AXA Re has some similarity to SCOR's, as it is suffering from similar issues. The group has taken steps to downsize its reinsurance business, concentrating on underwriting discipline and a reduction in the expense base realised by streamlining. The group's aim to withdraw from non-strategic activities with low profit potential started in 2002 and was completed in 2004. Its restructuring included the repurchasing of minority interests in AXA Re Finance and SPS Reassurance and the merging of the latter into AXA Re. AXA Re's 2004 results showed that the group's combined ratio improved from 104% in 2003 to 98.5% in 2004, with net underwriting income of EUR129m. This was achieved despite the fact that AXA Re was hit by six major market losses: an explosion at the Sonatrach refinery plant in Algeria, hurricanes Charley, Frances, Ivan and Jeanne in Florida and the typhoon Songda in Japan. These losses had a gross impact on technical results of EUR546m and a net loss of EUR256m (compared to a loss of EUR50m in 2003 caused by Hurricane Isabel).

AXA Re however had nowhere to hide when Eliot Spitzer, New York's Attorney General, and the SEC cast their eyes across the world. AXA Re was subpoenaed in mid-April 2005 for information in relation to reinsurance transactions with MBIA and the 1998 bankruptcy of Allegheny Health, Education and Research Foundation (AHERF), as well as non-traditional products.

Developments were also on the horizon for Caisse Centrale de Reassurance (CCR), which offers traditional reinsurance but distinguishes itself from other reinsurers by offering unlimited cover for specific risks, such as natural disasters in France or war risks. The unlimited cover is backed by the state, and the group has enjoyed an "AAA" rating from S&P since 2001, as it is less likely to default.

Talking about his meeting with the French Finance Ministry representatives, Werner Skrzynski reveals that the French government is trying to address the issue of French natural catastrophes, (an area under the monopoly of CCR) and to ascertain to what extent the traditional French reinsurance market can provide capacity, so the burden does not fall entirely on CCR. In the event of a sequence of catastrophes, CCR would have insufficient finances and would fall back on the state. This would effectively be another hit on the taxpayer.

Mr Skrzynski adds, "I do not believe that CCR will lose its share of the market, but rather we could see a combination of what CCR can do with the aid of the state, which is to provide the unlimited top end of the coverage, with the free market providing remainder capacity. This is the case with terrorism in industrial lines with CCR and international reinsurers providing capacity."

The main concern for French players in the near future is that they will have to defend themselves against the domestic banks stealing market share from one side and foreign reinsurers attacking on the other. There is also the worry that the industry will find itself up against a shortfall of staff over the next 5-10 years, as many current employees are approaching retirement age. Some argue that it is less the actual numbers that are of concern, so much as a shortfall in experience - and this despite the fact that France spends more on investing in human resources than other countries in Europe (with the exception of Germany).

But the fight is not over yet for domestic firms, and the French market has put firm action plans into place, which afford many opportunities to rebuild.


As Global Reinsurance was going to press, SCOR Group announced that it is "adapting its worldwide structures to its new business profile". Under the "New Scor" project, a 100% owned subsidiary is planned which will encompass all non-life reinsurance business, plus treaty and large corporate risk business. The project is designed to "restore the Group's competitiveness with regard to its competitors and achieve the objective of a cost ratio of 5% of written premiums between now and the end of 2007". This forms part of the "Moving Forward" plan.