After a tumultuous few years, France has recovered its footing and now boasts a thriving, if concentrated, insurance and reinsurance community, discovers Nick Thorpe.

Since joining the G6 group of industrialised countries in 1975 (which became the G8 in 1997), France has gone through a number of significant changes, most notably the adoption of the Euro on 1 January 1999 which replaced the French Franc completely in 2002. The country is a prolific investor and recipient of foreign investment. In 2003 it was ranked second in the list of recipients of foreign direct investment in the Organisation for Economic Cooperation and Development (OECD) countries, with $47bn flowing into the country, topped only by currency-magnet Luxembourg. In the same year, French companies invested more than $57.3bn outside of France, meaning the country is also the second largest outward direct investor behind the US.

France's economy benefits from both active government involvement and substantial private investment, in the form of almost 2.5 million companies. The government retains active interests in many parts of French infrastructure, with controlling ownership of telecommunication, railway and electricity firms. It also intervenes in much of the insurance and banking industry, although it has been gradually selling its holdings in many of these companies.

World leader

The strength and stability of the French economy has underpinned the insurance industry, allowing it to benefit from moderately low economic risk. With a GDP of $1.7trn, France is second only to Germany and the UK in Europe. With economic growth averaging at 1.5%, the country is below the Eurozone average (2%) but still maintains a "AAA" rating. Standard & Poor's rated 51 life and property casualty insurance companies in France in 2005, assigning an average insurer financial strength rating in the "A" range, reflecting the sound credit profiles for many French insurers (see Figure 1).

The French insurance industry is the fourth largest in the world behind the US, Japan and UK, with a total of EUR172bn ($203bn) in gross written premiums in 2004. Life premiums accounted for 65% of the market (and a massive 6.4% of GDP), or around EUR112bn, with non-life taking the remaining 45% (EUR60bn). The market is highly developed with a mature property casualty market.

The French market is also highly concentrated, both in life and property casualty, with the top five players accounting for around 70% of total premium income. A spate of acquisitions in the late 1990s shaped the industry into its current state, with formerly state-owned giants such as UAP and AGF group being snapped up by AXA Group and Allianz respectively. Consolidation activity has now moved into two distinct markets: mutuelles (health mutual insurers) and institutions de prevoyance (workers' compensation). Until recently, both were subject to bespoke regulatory and accountancy standards until the implementation of the European Insurance Directive. The sector is highly fragmented however, with over half of the mutuals disappearing over the last three years and many smaller organisations struggling to build and maintain a solid capital base.

While the market is fairly saturated this will not necessarily put off new entrants from coming into the market. As Pierre-Denis Champvillard, head of market operations at Caisse Centrale de Reassurance (CCR), points out, "The reinsurance market is very concentrated; there are three or four large French reinsurers and its all foreign players after that. A decade ago people used to say: 'In ten years there will only be five European insurers', but look at America - they have one language, one currency and about 4,000 life and non-life companies."

Banks enjoy the dominant position at the head of the French life market, although traditional insurers have recently entered the market too, taking on a sizable share. The sector is led by CNP Assurances which benefits from some state involvement and a 14% market share. The company accounts for EUR19bn of the total life premiums, mostly through control of the lucrative tax-free "Livre A" savings scheme. Life insurance is still seen as the preferred savings vehicle of French households, capturing 25% of total savings. With a steady increase in GWP from EUR101bn in 2003 to around EUR119bn in 2004, the life insurance market is still attracting new business.

Strong premium growth in recent years has been driven by rate increases and more selective underwriting. The supposedly mature market has still found areas to introduce new products, such as the popular GAV (guarentie des accidents de la vie), an individual policy that covers all aspects of the insured's private life. However, as Michel Hideux, deputy chief operating officer of Aon Reassurances, points out, the product has still yet to be fully tested. "Most of the companies in the French market are selling GAV in a very efficient manner. The growth is substantial and the results are quite good, although there is not fierce competition yet and there is still some uncertainty about the ultimate results from this type of business."

The rise in natural disasters - such as the flooding in the south of the country in 2002 with a cost of EUR700m and windstorms in 1999 that reached EUR1bn - coupled with a volatile stock market all contributed to tough times at the bottom of the cycle for P/C carriers.

But after repricing efforts and a portfolio spring clean, the market's combined ratio was a healthy 98% in 2004. Rates dropped an average of 10% in 2005 after stable premium growth since 2002.

However, this overall positive trend is in danger of being undermined by the increasingly soft motor rates. Gross written premiums for motor insurance reached EUR18bn in 2004, up from EUR14bn in 2000 and the while the primary rates are continuing to soften, insurers are transferring all their risk to reinsurers, leading to some hardening in premiums. Michel Plecy, treaty division and marketing manager at AXA Re, sees this trend continuing into next year. "Motor reinsurance premiums are going to continue to increase in 2007. The primary industry has been very successful at transferring all the risk to the reinsurance industry so reinsurers are suffering a lot and seeing a significant deterioration in loss ratios."

The French reinsurance industry is dominated by three main players - SCOR, AXA Re and CCR. SCOR, the fourth largest life reinsurer in the world, derives 70% of its income from Europe. In 2003, following unexpected losses in the third quarter of 2002, the company was downgraded to "BBB". It took two years and some very faithful clients before SCOR was upgraded back into the "A" ranks in August 2005. Since then the company has acquired German life reinsurer Revios in a deal worth EUR605m, been linked to a possible buyout of struggling reinsurer Scottish Re, achieved record operating results for 2005 and obtained a license to open a reinsurance office in Beijing, China. As Denis Kessler, chairman and CEO, commented when the company released its 2006 half year results, "This confirms the pertinence of the strategy that we have been following for the past four years: solvency and profitability have been fully restored."

AXA Re, meanwhile, is a self-styled "Bermuda reinsurer on the European continent". Part of the AXA group, the company was formed 25 years ago and participates in multiple business lines in countries worldwide. In June 2006 it was confirmed that AXA had signed over AXA Re to Paris Re, a newly-created company sponsored by a consortium of international investors led by Trident III. As the company enters 2007 rebranded as Paris Re, Plecy acknowledged the risk of complacency a quiet year can bring. "We are going to be focused on managing our cat exposure in 2007 due to the limited retrocession at the moment," he said. "We need to be extremely careful as to any diversification we undertake; we need to achieve profitable margins. One potential good year does not mean we can forget the risks."

CCR, established in 1946, offers traditional reinsurance in France and from other offices worldwide. Rated "AAA" by S&P since 2001, the company is unique in France through its offering of unlimited coverage for specific risks such as natural disasters and war. This is possible through its arrangement with the state, which guarantees 60% of the organisation's business. There has been debate in the country about the ability of the French market to cope in the event of a major catastrophe. Critics have pointed out that in the event of a major loss occur, CCR would not be able to absorb the full amount and would turn to the state. In effect this means the taxpayer would be picking up the bill.

Pools, politics and the private sector

With Solvency II impending, a significant new piece of regulation for France, more change is on the horizon. But it is unlikely to alter the financial strength profiles of French insurers and reinsurers owing to their existing strong capitalisation. However, there is general consensus that the revised solvency margins required by the new rules, while unlikely to affect large insurers and reinsurers, are likely to put pressure on smaller firms. "The regulation has not directly affected businesses so far but the reaction of insurers and reinsurers to Solvency II has led to some small players thinking of merging in the future," revealed Lotfi Elbarhdadi, credit analyst at S&P.

Many larger firms, meanwhile, have already begun preparations and as such, the impact should be marginal. "In France there has been noticeable professional attention by the insurance and reinsurance community on the possible consequences of Solvency II," confirmed Hideux. "The mutual companies are paying very close attention to the consequences of these new regulations, especially on capital requirements. Models and solutions are being developed to cope with the regulatory changes and pressures."

France maintains a strong tradition of state intervention, despite some reform since integration with the EU. The French authorities are credited with crucial organisation at times when capacity in some lines is short, natural catastrophes and terrorism in particular. GAREAT, the French terrorism pool, is one such government-backed initiative. Formed following the September 11 attacks and likely bolstered by public opinion and concern at the time, the fund became active on 1 January 2002. GAREAT, like most pool funds, spreads commercial property losses of up to EUR2bn across all market participants and then apportions any further unlimited excesses to state-backed CCR. Despite revisions in recent years, the fund - unlike the Terrorism Risk Insurance Act in the US which has been the stuff of severe criticism, even since its revision last year - seems to be a popular piece of legislation. "GAREAT has been successful since it was set up in the aftermath of 9/11," enthuses Virginie Crepy, credit analyst at S&P. "It has allowed insurers to play their part while keeping CCR involved in the upper and unlimited layer of the programme."

Created in 1982, France's "Cat Nat" is the national natural catastrophe system covering losses on both personal and commercial property. CCR provides the protection and, uniquely, benefits from unlimited state guarantee. France has suffered multiple natural catastrophes in the last decade, particularly in the south where windstorms and flooding have caused upwards of EUR2bn in losses over the last ten years. In light of increased flooding recently, and a worldwide resurgence in interest in natural catastrophes, major reinsurers such as Munich Re have begun to offer cover for such specific perils, whether through traditional reinsurance or alternative risk transfer mechanisms, such as securitisation. It is therefore likely that the 20-year-old scheme will be modified in the near future in light of the new commercial capacity, although not all are in agreement of when this will happen. "There is a lot of talk of reforming elements of the Cat Nat scheme but I don't think this is going to happen for at least another year, until the next election," says Plecy. "It's a very political issue."