February 2020
Summary
Réalités industrielles
The insurance industry today
Complete issue
This issue was coordinated
by Pierre-Charles PRADIER
This issue was coordinated
Introduction: Pierre-Charles PRADIER,
A look at the insurance industry
The French insurance industry
By José BARDAJI
Fédération française de l’assurance (FFA)
Insurance in France collects nearly €220 billion in premiums and has a portfolio of €2411 billion, the equivalent of 102% of the GDP. These statistics reflect how heavily this industry weighs on the economy, an industry in stride with all French households and firms during all stages of their activities or development. Insurance protects the French and their property (cars, houses, etc.) against risks of all sorts. In more and more cases, it is also protecting the business and goods of firms from cyberattacks. It finances the economy, firms and public administrations (mainly European), in particular via the success of life insurance investment policies.
The principal world insurance markets
By Jean-François OUTREVILLE
Professeur émérite Burgundy School of Business Université de Bourgogne Franche-Comté
Two important characteristics of insurance markets worldwide are described. The first is the relation between the growth of insurance and of the economy, as assessed by several empirical studies. The second is the importance of insurance in the context of “liberalized” trade and globalized finance. This analysis uses direct foreign investments to demonstrate the driving force of insurance markets.
Les fortunes contrastées de l’assurance et du courtage
By Pierre-Charles PRADIER et Delphine MANTIENNE
Propos recueillis par Pierre-Charles PRADIER et Delphine MANTIENNE
Reinsurance: From guaranteeing global financial stability to covering global warming
By Patrick THOUROT
Inspecteur général des Finances honoraire
Reinsurance is not well known despite its overriding economic role, namely: guarantee the financial system’s stability, transfer risks and manage these transfers, and make it possible to insure “cutting-edge” and emerging risks. For this reason, reinsurers are on the front line in studies for assessing and managing the effects of global warming and in providing insurance for the environmental transition.
Insuring and financially protecting agriculture
By Didier FOLUS
CEROS, Université Paris Nanterre
Pierre CASAL RIBEIRO CEROS
CEROS, Université Paris Nanterre
Bruno LEPOIVRE
Pacifica, Crédit Agricole Assurances
et Antoine ROUMIGUIÉ
Airbus Defence & Space
Agricultural production is subject to variations affecting crops, their yields, prices or even sanitary status. The management of price-related risks heavily relies on adapted financial instruments or public subsidies, and that of the risks related to yields depends on subsidized insurance programs and public funds. Various crop insurance contracts (multirisk, climate, grasslands, sales, etc.) offer farmers a coverage regulated by the Common Agricultural Policy (in particular subsidized premiums). Nonetheless, the penetration rate of these contracts is still low when compared with French agriculture’s economic importance. Assuming this situation and supposing increased climate changes, insurance firms, farmer organizations and public authorities are trying to further the pooling of risks so as to offer the farm world an effective financial protection. Several techniques ( e.g. , teledetection by satellite, indexed insurance models, “microinsurance”, or the transfer of risks toward financial markets) are being used to deal with various elements of risk, whether idiosyncratic or systemic. Research along these lines brings together insurance companies, organizations specialized in weather or space, and universities along with their research laboratories. Under the auspices of public authorities, this research has helped strike a balance between private and public forms of insurance coverage that provide better financial protection to agriculture.
Current issues
To what extent do pension funds help solve the problem of the French retirement system?
By Philippe TRAINAR
Professeur titulaire de la chaire assurance du CNAM Directeur de la Fondation SCOR pour la science
The worth of pension funds has always been questioned in France, whence their place as outsiders in the national economy. The debate about them might have left people with the impression that their utility was limited to amortizing changes in population trends. Nonetheless, the economic implications of a retirement system based on capitalization as compared with a pay-as-you-go system reach far beyond the capacity to amortize demographic shocks. Systems based on capitalization are extremely effective for making up for the “political” risks that an unfunded system shifts onto pensions. After scrutinizing the objections to pension funds, the conclusion is drawn that the only real difficulty is the institutional problem of switching from an unfunded, pay-as-you-go system toward capitalization. This difficulty calls for qualifications however, since the French retirement system tends to be evolving toward a minimalist system of a Beveridge type.
Private insurance can help fund care for the frail elderly
By Arnaud CHNEIWEISS
Délégué général de la Fédération française de l’assurance (FFA)
Although the demographic and financial aspects of care for the frail elderly cannot be exactly calculated, the magnitude is known. France devotes more than 1.4% of its GDP to the management of “old-age dependency”, but this amount must be substantially increased — even doubled by mid-century. To cover this phase of old age, insurance companies have proposals and products that must be combined with public means in order to deal with the volume of needs.
The impact of low interest rates on insurance
By José BARDAJI
Fédération française de l’assurance (FFA)
and Jean MALHOMME
AXA France
The current environment of low interest rates has an impact on the insurance industry. In particular, life insurance investment policies are affected but still have leeway for meeting their obligations. Nevertheless, life insurance must accelerate its transformation, in particular on the side of liabilities by diversifying the policies offered to the French who have savings. The recently adopted Pacte Act has done its part by simplifying the Eurocroissance contracts and enhancing the attractiveness of retirement savings plans of a new type. Low interest rates have had less of an impact on other sorts of insurance policies, since premiums are periodically adjusted to counterbalance unfavorable swings in the financial markets. The downward trend on the financial markets implies improving results in the core insurance business. This trend is even more noteworthy since it bears long-term risks (in terms of liability and for builders’ risk insurance).
Big data, GAFA and insurance
By Arthur CHARPENTIER
Université du Québec à Montréal
High tech and insurance companies seem opposites in every way. The first, agile and rapid, are obsessed with the future whereas the second, conservative and reflexive, are fascinated with the data collected by high tech. However these two businesses are eyeing each other and have started forming partnerships as they come to understand that their core business is data.
Insurance in China
By Marc-Philippe JUILLIARD
Directeur S&P Global Ratings Maître de conférences associé, CNAM-ENASS
The Chinese insurance market has thrived and become the second biggest worldwide, behind the United States. However the average insurance premium per inhabitant and the share of the insurance industry in China’s GDP are still far below the levels observed in developed countries. This suggests still very strong prospects for growth during the coming decade. At present, the Chinese market is relatively balanced between life insurance and other types of insurance, this being evidence of its growing maturity. It is also strongly regulated, and a small number of players with large market shares are dominant. Foreign insurance companies are not very significant. Despite their strong growth, Chinese insurance companies have encountered several problems: the cost of distribution networks, the need to adapt their product line the policyholders’ changing needs, and the rising costs of natural catastrophes.
Variable Annuities and Systemic Risk
By Wolf WAGNER
Rotterdam School of Management
This chapter argues that variable annuities may cause systemic risk in the insurance sector. Life insurers, in particular in the US, have transformed their business by moving from largely diversifiable activities to taking on market risk. This exacerbated by the fact the variable annuities are typically supplemented with guarantees. Such guarantees are effectively put-options on the stock market and expose insurers to significant stock market risk. Although insurers hedge a large fraction of the guarantees, the hedging also causes insurers to shift their asset allocation towards illiquid bonds. This backfires in the event of a correlated shock, where collective firesales of illiquid bonds result. The implications for the capital of the US life insurance sector, and systemic risk, are significant.
Long-term prospects
Reinsurance and systemic risks
By Denis KESSLER
SCOR
The 2008 financial meltdown has stimulated the production of regulations about the financial sector, with special attention paid to preventing “systemic risks”. The reinsurance industry is not a source of systemic risks. On the contrary, it plays a stabilizing role in the whole economic and financial system owing to its absorption of exogenous shocks and its fundamental activity of pooling risks on a global scale. The sector of reinsurance has amply proven its resilience. Very few of these insurers were in trouble during the meltdown, and what troubles they encountered involved their “quasi” banking activities instead of their usual reinsurance operations. The principle of optimal regulation must be advocated to establish a fair balance between stability/solvency and efficiency/growth. From this viewpoint, regulations should not impose an unjustified burden of equity requirements on the reinsurance business, which fundamentally contributes to the resilience of economies and societies.
Understanding cycles in the insurance industry
By Gilles BÉNÉPLANC
Verlingue
Cycles in earnings are a major characteristic of the operation of the insurance and reinsurance markets. Professionals must better understand this even though recent market conditions and the abundance of cash have made it more complicated to observe trends and analyze cycles. The task of research in economics is to advance farther in simulating and predicting the occurrence of cycles under current conditions.
What future for predictive probabilities in insurance?
By Arthur CHARPENTIER
Université du Québec à Montréal
Laurence BARRY
Chaire PARI (Programme de recherche sur l’appréhension des risques et des incertitudes)
and Ewen GALLIC
Aix-Marseille Université, CNRS, EHESS, Centrale Marseille, AMSE
Since insurance policies are classical examples of contingency contracts, insurers have to regularly quantify uncertainty and calculate probabilities so as to offer premiums that are “fair” with respect to the obligations of both parties. Is it not high time to ask questions about insurance practices as artificial intelligence is thriving and proposing predictive algorithms of an unprecedented precision? Might big brother and big data not put an end to this uncertainty?
4 ‒ Regulation
Regulating insurance companies in Europe: What is a fair level of harmonization?
By Bernard DELAS
Autorité de contrôle prudentiel et de résolution (ACPR)
In force since 2016, the Solvency II Directive seeks to establish a fair balance between insurers in Europe and market security. Thanks to it, very important advances have been made in risk management and governance. However these new standards are hard to apply in the same way throughout the fragmented European insurance market. An illustration comes from the series of failures that, related to builders’ risk insurance in France, originated in other member states. This market fragmentation also affects the use of measures for facilitating the transition from Solvency I to Solvency II but have also produced differences in the meaning of solvency indicators and ratios from one member state to the next. The excessive complexity of the Solvency II standards hampers a convergence of the methods used by national authorities of oversight; and in insurance companies, the risks have increased of a misunderstanding between teams of technicians and the governing bodies.
Solvency II: Have insurance companies been trapped?
By Sylvestre FREZAL
Cofondateur d’Appenin et directeur à Covéa
Despite its difficult passage, Solvency II represents a state-of-the-art prudential regulation of the insurance sector. Enforced since the start of 2016, this directive is now widely criticized. Two postulates underlie it: we are able to quantify extreme risks, and capital requirements are the basis of incentives for corporate leaders. Relying on operational modalities ensuing from these two postulates, Solvency II has the objective of optimizing both risk management in insurance companies and the uses of capital in this sector. With hindsight, this article inquires into this directive’s consequences and the pertinence of its postulates. The quantification of rare risks is not reliable in terms of magnitude; and the “incentives” used dilute responsibilities. By homogenizing how we think about risks, Solvency II has introduced a systemic risk.
Are reinsurance companies overcapitalized?
By Anna BENDER
JLT Re
The cost of insurance and reinsurance tends to follow the classic supply and demand dynamic – if there is too much supply relative to demand, prices will decline and vice versa. In reinsurance, we tend to measure supply in terms of capital, i.e. the money available to (re)insurers to support the risks that they accept from their policyholders. Demand is defined as the amount of premium a (re)insurer is receiving from their policyholders in exchange for taking on a part or all of one or several risks. Over the years the cost of reinsurance has declined to almost unsustainable levels due to an increase in capital relative to demand. We believe that falling prices in the reinsurance industry due to the supply and demand argument are somewhat misguided. The cause for the increasing levels of (re)insurer capital over the past few years are mainly driven by the increasing demands of the rating agencies. High financial strength ratings as assigned by the rating agencies have become a necessity to (re)insurers in order to successfully compete in the market and significant amounts of capital, often far in excess of regulatory demands, tend to be required to achieve a high financial strength rating.
The freedom to provide services: Issues and challenges for the French and European insurance industries
By Philippe POIGET et Christian PIEROTTI
Fédération française de l’assurance (FFA)
The freedom of establishment and freedom to provide services are major aspects of the EU’s internal market. This key tool for financially developing the internal market allows a firm registered in one member state to offer its services in all countries in the Union. For the insurance sector, this freedom to provide services has opened national markets, boosted trade on the continent and reinforced coordination between member states. Nonetheless, major issues have arisen in relation to fair competition and market stability. The lack of European harmonization has hampered crossborder business transactions in the insurance industry and brought to light market defects. Aware of the risks and challenges related to this freedom to provide services, European institutions must endeavor to adopt the necessary measures for a convergence in the oversight exercised by national authorities and for fair competition throughout the single market.
Challenges and opportunities for the insurance sector in Europe
By Gabriel BERNARDINO
Chairman, European Insurance and Occupational Pensions Authority
The insurance sector is facing many challenges while the rapidly changing business environment also give rise to a number of opportunities. As insurers adapt to the new landscape, insurance regulators and supervisors must also evolve. As insurers, regulators and supervisors navigate the digital revolution, the challenges of cyber risk and corresponding opportunities of cyber insurance, the risks associated with a prolonged low yield environment and the opportunities of taking a stewardship approach in relation to sustainable finance, it is essential that policyholders’ interests remain a priority. Since its inception, the European Insurance and Occupational Pensions Authority (EIOPA) has worked with supervisors across Europe to foster a common approach to supervision to ensure that consumers remain protected no matter where they live or from where they bought their policy. As a European supervisor, EIOPA will continue to work with consumers, industry and supervisors to make sure that Europe is resilient in the face of challenges and open to the opportunities that the next decade will bring.