Fitch Ratings has said its outlook for the French life insurance remains negative despite an improving business mix.

Nevertheless, it said its outlook for the ratings of the French life insurance companies is stable, reflecting a combination of strong capital, diversified business mix, large scale and important market position of the French life insurers rated by Fitch.

The ratings agency said the French life insurance market faces a difficult operating environment as persistent low interest rates constrain profitability, particularly for "euro-denominated" (ie with-profits) products. Insurers’ steps to reduce returns credited to policyholders have so far been insufficient to counteract the drag on earnings from low rates, said Fitch.

Although the sector has shown adaptability in developing the unit-linked (UL) and protection businesses, Fitch said the product mix on insurers’ balance sheets remains skewed towards guaranteed products.

It believes this will continue to damage life insurers’ profitability and solvency as the traditional savings business is less profitable and more capital-intensive than the UL or protection businesses.

Fitch expects net collections (premium income less benefits paid to policyholders) to remain solid in 2016, driven by sales of UL products and the lack of attractive alternative savings products.

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Moreover, the further reduction on Livret A’s (France’s most popular bank deposit product) interest rate (now 0.75%) should lead more savers to seek higher returns from longer-term life savings products.
Fitch expects French life insurers to fare well under Solvency II, but capital ratios may be lower than under Solvency I.

According to the Autorite de controle prudentiel (ACPR), life reserves under Solvency II will on average be higher than their book value and own funds will be lower than under Solvency I.

This difference is attributable to unrealised gains that are part of solvency capital under Solvency I, but are largely attributed to policyholders under the Solvency II calculation of best-estimate liabilities.