French life Insurers under pressure to cut bonus rates as low interest rates bite

Low interest rates and flattening yield curves are putting pressure on French life insurers’ traditional operating models, with the consequent solvency considerations and regulatory concern prompting them to reduce bonus rates to euro-denominated contracts and diversify their revenue streams in favour of capital-light products.

This is according to a new Best’s Commentary, French Life Insurers Under Pressure to Cut Bonus Rates as Low Interest Rates Bite. It says that AM Best expects proactive actions by French life insurers to help them withstand external pressures on solvency and performance.

Ghislain Le Cam, director, analytics at AM Best, said: “From 2020, AM Best expects French life insurers to significantly reduce bonus rates on traditional savings products to reflect the persisting low yields on French government bonds.” He added that this should enable insurers to protect their margins on core traditional savings business while also encouraging policyholders to redirect their savings toward capital efficient unit-linked products, which have the potential for better performance.

Efforts by insurers to diversify their business away from interest rate-sensitive products toward low risk, capital-efficient ones should be helped by the adoption in 2019 of the Plan d’Action pour la Croissance et la Transformation des Entreprises Law (the PACTE Law).

Pierre Tournier, senior financial analyst, added: “While French savings levels are high, the private pension segment is relatively underdeveloped. The PACTE Law has created a simpler pension product, the Plan Épargne Retraite (PER), which appears to address some of the major issues surrounding French pensions.” Tournier added that to encourage policyholders to adopt these plans, the law provides for a transition period during which transfers into PER contracts receive favourable tax treatment.

AM Best expects the industry’s efforts to transform its profile and the PACTE Law to have a positive impact on the business mix of French life insurers. However, improvements in solvency ratios and operating performance may take time to materialise.

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