The 2020 outlook for the French insurance sector is negative, reflecting growing pressures on the property/casualty insurers’ profitability from low interest rates, Moody’s Investors Service said in a report. Moving further away from traditional guaranteed products will also be difficult for life insurers.

The outlook for the French insurance market was changed to negative on 18 November 2019 when Moody’s updated its outlook on the European insurance sector.

“A sharp fall in interest rates in 2019 will reduce French P&C insurers’ investment returns, which account for a significant share of their profits, and moderate price increases will barely offset claims inflation,” said Benjamin Serra, a Moody’s senior vice president.

P/C insurers’ reliance on investment returns is greater in France than in all other major European markets, with the exception of the Netherlands, because underwriting profit is weaker, according to Moody’s.

Moody’s said it expects French P/C insurers’ investment returns to decline by 20 to 40 basis points next year. P/C insurers’ assets have a typical duration of two to five years, and the sector reinvests 10%-35% of its investment portfolio every year. As a result of a sharp fall in interest rates during the first nine months of 2019, Moody’s reports that the industry has invested new money or reinvested expiring assets at rates below the current investment yield, which will weigh on next year’s investment returns.

The outlook also notes that competition is fierce, with a growing market share of subsidiaries of banks, also constraining insurers’ ability to increase prices to offset pressures on investment returns.

French life insurers have been attempting to move away from guaranteed products in favour of unit-linked products, which leave investment risk with the policyholder, since 2012. However, the share of unit-linked sales has plateaued at just below 30% of premiums in 2017 and 2018, before declining in 2019, reflecting policyholders’ risk aversion amid rising financial market volatility.

This highlights customers’ continued preference for guaranteed returns and, as the global macroeconomic environment becomes more uncertain, the risk of volatility in financial markets will remain high. This would make it more difficult for insurers to sell unit-linked products in 2020.

Moody’s also highlights challenges in the health and protection segments which are very competitive. Profitability of the long-term protection business is also affected by low interest rates, while the health segment remains under the government scrutiny.

*This story appeared previously in our sister publication Insurance Journal