Strong fundamentals and management actions underpin French insurance sector

Written by Adam Cadle

28/11/2023

The French insurance sector is in a good position to withstand weak macroeconomic prospects due to resilient credit fundamentals and effective management decisions, Fitch Ratings has said.

"However, asset risk, lapse risk in life, claims inflation and natural catastrophe risk in non-life remain key credit vulnerabilities that could be revealed in a downside scenario going beyond our base case," Fitch added.

Fitch has revised its outlook on the French non-life sector to neutral from deteriorating to reflect our expectation that insurers’ strong pricing and underwriting actions will mitigate claims inflation pressures and support technical margins. Higher-for-longer reinvestment yields are also supportive of 2024 earnings.

However, the ability to maintain pricing above loss trends while managing volatility through prudent reserving and effective reinsurance protection is likely to remain challenged amid persistent albeit declining inflationary pressures and rising risks related to climate change or social unrest.

Fitch's sector outlook for life is also neutral. High rates support technical margins on general accounts reserves but will still not lead to a meaningful improvement in profitability next year. This is because of the long asset duration of portfolio and expected muted premium income growth.

Fitch expects lower net inflows on unit-linked product and continued outflows on general account products. Insurers are likely to raise discretionary policyholder crediting rates above recurring asset yield, releasing profit-sharing reserves to contain surrenders. Balance sheets are sufficiently liquid to cover rising cash outflows without leading to investment losses in most scenarios.

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