French insurers shy away from internal models 27 January 2012 Published in: Regulation, Solvency II, Areas, Rest of Europe Companies: ACP, PwC, Axa, Fitch, Towers Watson, FFSA Only a handful of firms will be ready to implement an internal model and the whole French market is struggling to prepare for Solvency II, with mutuals particularly badly hit by the proposed new regulations. Sarfraz Thind reports.
Paris (©Rosss) When the Autorité de contrôle prudentiel (ACP), France's financial services regulator, first posed the question of capital modelling in a Solvency II questionnaire in 2009, 20 or so insurers indicated they would use internal models for risk capital calculations. Last October, the ACP published a second survey of French insurers' preparedness for Solvency II. This time only five or six said they would be looking to implement an internal model from the outset, says Jimmy Zou, partner and head of Solvency II practice for France at PricewaterhouseCoopers in Paris.
Partial internal models According to various market participants, only around four or five large companies ‐‐ the likes of Axa, Allianz and CNP ‐‐ will be ready to launch a full internal model, the others pitching for partial internal models. "Things became more complex than previously expected," says Zou. "There are some big French insurers not ready for internal models. But regulators are trying to push them in this direction. They can't accept that only one or two are going to be ready with internal models from the start." Responding to the October questionnaire, just 10.6% of French insurers said they had a fully‐ worked out convergence strategy for Solvency II, while about 80% were working on a plan of some sort. The ACP hopes that the questionnaire will jog the less‐prepared insurers into action. But with final proposals still under discussion, confusion reigns. Jimmy Zou of PwC, Paris: "There are some big French insurers not ready for internal models. But regulators are trying to push them in this direction." "The fact that the final specifications are still under discussion has been used by insurers as an argument to delay investment in the project," says Marc‐Philippe Juilliard, senior director, French insurance, at Fitch Ratings. "But you have seen a more recent acceleration in implementation." Juillard says that the French regulator faces the key challenge of setting up a standard for internal models in the next couple of months. But, as with many other European countries, the challenges have been exacerbated by a lack of regulatory resources and technical expertise. "They need to agree on what role the regulator is ready to allow for internal models," says Juillard. "As with many industry participants, the French insurance regulator is struggling to find people who are sophisticated in actuarial and technical matters to deal with the new rules. But this is a problem for many European regulators."
Pressure on mutuals The pressure of adapting to the new regulatory regime has already been telling for some parts of France's insurance sector ‐‐ in particular the swathe of mutuals that make up about 25% of the overall market. Two years ago there were over 2,000 mutuals in France. This has come down to about 700 now, and is likely to shrink even further before Solvency II comes into force. "You have many little companies with less than 100 people so it's a big problem for them to put into place a Solvency II governance structure," says Zou. "In one or two years we think we will have 300 to 350 mutuals in France." Marc‐Philippe Juilliard of Fitch Ratings: "The fact that the final specifications are still under discussion has been used by insurers as an argument not to invest in the [Solvency II] project."
Finding the resources to deal with new regulations like reporting is a challenge. "These companies are small and privately owned and are not used to frequently communicating financial statements or Solvency to the public," says Juillard. Some 85% of respondents to the ACP questionnaire said they had started building provisions to deal with pillars 1 and 2, but only 53% had a plan to tackle pillar 3.
Sylvaine Salahub, Towers Watson While the recent extension of the deadline for Solvency II came as a relief for many French insurers, the industry still faces a "frightening" regulatory environment over the next few years, says Sylvaine Salahub, office leader, RCS France, at Towers Watson in Paris. "What has been asked of insurers is very difficult to do," says Salahub. "They have had to absorb a new set of calculations and integration in the business planning. Even if there will be a little extension, it takes more than two years to understand the environment. I think some players will be completely out of the game."
Further delay? Reports that the French mutual industry had called for a further delay in the rules to 2015 are denied by the French Federation of Insurers (FFSA), France's insurance industry body. "Our members, who have invested heavily in preparing for Solvency II and are ready to apply it, do not want the entry into force to be postponed," says a FFSA spokesman. FFSA spokesman: "Our members, who have invested heavily in preparing for Solvency II and are ready to apply it, do not want the entry into force to be postponed." Despite the FFSA's bullish statement, concerns remain about the preparedness of the sector. While the fifth quantitative impact study (QIS5) results were positive for France ‐‐ with 60% of the companies having a solvency ratio over 200% ‐‐ market volatility over the last couple of years has hit insurers hard, says Salahub. "In 2009 French insurers were probably in better shape than other markets, so QIS5 wasn't too bad," explains Salahub. "But now the Euro is a nightmare. When the financial situation is so bad, there is a big need for capital. But there is a lot of volatility and it is difficult to persuade people to buy shares."
Salahub says that it's not just smaller mutual French insurers which are behind with preparation but also larger groups which are "not in good shape." One particular problem faced by the industry lies in the asset mix on balance sheets.
Equity/bond mix French insurers have traditionally held a high proportion of equities compared with those in other countries. While this has come down from the roughly 16% of three or four years ago to about 6%‐7% now, the move to sovereign bonds has not offered much respite. "The higher proportion of equities introduces volatility into the assets and volatility in the asset and liability management," says Salahub. Insurers "also suffer from lower rates in bonds and credit spreads." The industry also faces problems with its insurance products ‐‐ in particular profit‐sharing policies. French life insurance companies have to pay policyholders at least 85% of their net financial revenues under a profit‐sharing mechanism known in France as participation aux bénéfices. Sylvaine Salahub of Towers Watson, Paris: "In France you can't offer products competitively under Solvency II because you have to give profit‐sharing." Profit‐share policies remain by far the largest policy type in the sector and have hamstrung French insurers' ability to compete with other European insurers. "There is a big crisis with the products we have," says Salahub. "In France you can't offer products competitively under Solvency II because you have to give profit‐sharing. The government will have to rethink the profit‐sharing structure, though this might not happen by Solvency II."
Volatility issue The FFSA believes that the main issue for French insurers is the volatility of the solvency ratio and potential pro‐cyclical behaviour that would result. "The consequences could be drastically dangerous for the whole European economy," says an FFSA spokesman. France's problems ‐‐ the gap between large and small insurers, the reduction in firms seeking internal models, the under‐equipped regulators ‐ seem to be emblematic of the struggles faced by most of the European insurance industry in dealing with Solvency II.The issues the country faces are not unique to French insurers alone, and in this it offers something of a benchmark for other countries to measure themselves against. "I don't think that French companies are behind, I think the UK or German markets are advanced," says Zou. "But the rest of the European countries aren't necessarily more advanced [than France]. The problem in France is that there are many little players so there seems to be a lack of maturity."
