2013-07-09-奥纬咨询-French_Life_Insurance_36页_662kb

Summary of "French Life Insurance: One life ends; another begins"

Core Content

This report analyzes the challenges facing the French life insurance industry, particularly the fonds en euros product, and outlines both short-term and long-term strategies for insurers to improve profitability and prepare for future opportunities. It highlights the structural issues in the French pay-as-you-go pension system and its implications for the life insurance sector.

Main Product: Fonds en Euros

• Dominance: The "fonds en euros" product accounts for 85% of total savings reserves (excluding pensions) and 48% of savings withdrawals are used for consumption, 22% for real estate, 13% for investments, and 17% for other purposes.
• Guarantees and Liquidity: It is liquid and offers guarantees that are perceived as risk-free, making it popular with consumers.
• Investment Mix: Insurers typically invest in sovereign debt (45%), corporate debt (35%), direct loans (5%), equities (5%), and real estate (6%).
• Return on Capital: Despite its popularity, the product generates a poor return on capital, estimated at ~4% after tax, due to high capital requirements and low investment spreads.
• Lapse Risk: Over 65% of contracts are more than 8 years old, meaning lapse risk is significant. The only penalty for early withdrawal is the loss of tax benefits, which is not as deterrent as in other markets.

Unit-Linked Products

• Characteristics: Unit-linked products are less popular with consumers but more profitable for insurers.
• Capital Intensity: They require only ~1% of reserves as capital, mainly for operating risk.
• Guarantees: Many insurers now offer "at maturity" guarantees, which increase capital consumption but still result in ~40% return on capital.
• Revenue Structure: Most revenue comes from commissions on assets under management, with ~75% of insurers' income from this source.
• Profitability: The return on capital for unit-linked products is ~10 times higher than for fonds en euros, at ~40% vs ~4%.

Short-Term Strategies

• Selective Rate Cuts: Insurers can cut credited rates on fonds en euros with minimal volume loss and significant improvement in investment spread margin.
• Product Redesign: Introducing products with at-maturity guarantees or unit-linked with guarantees could improve profitability, though they are not likely to fully replace the fonds en euros.
• Cost Management: Operating costs can be further reduced, as they currently consume ~77bps of fonds en euros reserves.
• Liquidity Management: Insurers need to increase allocation to short-term and liquid assets to manage lapse risk, which may forfeit the illiquidity premium.

Long-Term Opportunity: Private Pensions

• Pay-As-You-Go Crisis: The French state pension system is facing a significant deficit, expected to rise to EUR135bn by 2060.
• Government Response: The government will likely reduce retirement incomes, leading to a shift in demand towards private pension products.
• Private Pension Potential: We estimate that pension funds under management could reach EUR400bn to EUR1.0 trillion by 2040, up from ~EUR140bn currently.
• Role of Insurers: French life insurers are well-positioned to provide private pension products, given their experience with savings and investment.
• Market Readiness: Insurers must prepare suitable pension products and ensure distribution capacity, both for group and individual pensions.

Structural Challenges

• Crowding Out by Government: The French government provides tax-funded, pay-as-you-go pensions, which has crowded out private pension options.
• Low Interest Rates: Low real interest rates and slow money supply growth have reduced the appeal of savings and increased liquidity risk.
• Economic Capital Requirements: The economic capital requirement for fonds en euros is ~4%, with ~65% attributed to investment risk.
• Lapse Risk in Context: In contrast to other countries, French policyholders face minimal penalties for early withdrawal, increasing the likelihood of large-scale lapses.

Conclusion

• Short-Term Actions: Insurers should optimize current products by cutting rates, re-designing them, and managing costs to improve profitability.
• Long-Term Outlook: The emergence of a private pension market is the only viable long-term solution to the structural issues in the French life insurance sector.
• Conclusion: While current products are unprofitable and vulnerable, the private pension opportunity offers a potential growth path for the industry. Insurers must act now to position themselves for the future shift in demand.

Key Figures and Data

• Total funds under management: ~EUR1.5 trillion.
• Fonds en euros reserves (2011): EUR1,153bn.
• Unit-linked reserves (2011): EUR204bn.
• Pensions reserves (2011): EUR137bn.
• Annual deficit in state pension system: EUR14bn (public source), expected to reach EUR135bn by 2060.
• Credited rate on fonds en euros (2012): ~3% before tax, ~2.5% after tax.
• Livret A rate (2012): 1.75%.
• Return on capital for fonds en euros: ~4%.
• Return on capital for unit-linked: ~40%.
• Lapse risk spike: Occurs when contracts reach 8 years.
• Investment spread margin: ~80bps on fonds en euros reserves.
• Operating costs: ~77bps on fonds en euros reserves.
• Economic capital requirement: ~4% for fonds en euros.

Distribution Model

• Bancassurance Dominance: The French life insurance market is dominated by bancassurers, with CNP Assurances (via Banque Postale & Caisses d'Epargne) holding the largest market share at 17.2%.
• Distribution Challenges: Direct sales models (e.g., Boursorama, Fortuneo) are increasing competition, making it harder for insurers to impose entry fees.

Final Note

French life insurers must adapt their current products to improve returns and manage risk, while also preparing for the private pension opportunity that may reshape the industry in the coming decades.