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Research Directorate – Dominique Durant
Dominique DURANT
Deputy head of Research Directorate
EIOPA advanced seminar quantitative
techniques in financial stability December 8, 2016
Impact of a low-yield environment
for the main French insurers
Research Directorate – Dominique Durant
Sommaire
1. Participation rates down since several years
2. Low guaranteed rates, at least on individual contracts
3. The profit sharing minimum requirements is still not binding
4. Interactions between return on assets and profit-sharing
5. A high level of economic wealth
6. Forward-looking: investment return rate projection
7. Macro-prudential measures
2 23/01/2017
Research Directorate – Dominique Durant 3 23/01/2017
A large majority of euro-denominated contracts
As at end 2015, the euro-denominated contracts represent nearly 80% of reserves against
less than 20% for the unit-linked
Insurers adapt to low yield environment by decreasing euro-denominated insurance
contracts to the partial benefit of unit-linked contracts
Net premium cumulated from the beginning of the year
euro-denominated contracts (left) – Unit linked contracts (right)
82%
18%
Top 12
Euro-denominatedreserves
Unit-linked reserves
215 bn
962 bn
0
2000
4000
6000
8000
10000
12000
14000
16000
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52
Mill
ions
d'E
uros
Collecte Nette depuis le 1er Janvier (Supports rachetables en euros)
2016
2015
2014
-2000
0
2000
4000
6000
8000
10000
12000
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52
Mill
ions
d'E
uros
Collecte Nette depuis le 1er Janvier (Supports rachetables en UC)
2016
2015
2014
Research Directorate – Dominique Durant
4 23/01/2017
Bonus rates down
Average participation rates since 2007
But the decline is slower than the 10-year OAT rate
It is also slower than the rate of saving accounts, at least in 2015
Perimeter : TOP 12
Research Directorate – Dominique Durant
5 23/01/2017
Significant dispersion of bonus rates
Dispersion of participation rates since 2006
A prisoners dilemma game with a leading role of the first announcer of the yearly
participation rate
Some important insurers, especially bank insurers, have a low bonus rate,
Perimeter : TOP 12
Research Directorate – Dominique Durant
Technical interests
Limited to 75 % of the TME (10-year French government bonds rate ) since June 1st, 1995 (art. In 132-1) under 8 years and 60% above 8 years.
In 2015, the average technical interest is 0,42% on individual contracts (92% of PT) and 1,51% on collective contracts (8% of PT), with a global average of 0,51%
Other guaranteed rates
Possible to take additional commitments is limited to 2 years (art. A 132-2 et A 132-3) and marginal for the main insurers
6 23/01/2017
Low guaranteed rates, at least on individual contracts
Research Directorate – Dominique Durant
Higher lapse rate on contract with high technical interest rates:
Either through benefits (subscribers are older)
Or through surrender (due to commercial incitation by insurers)
Net premium by contract type depending on the technical rate
•
• B
The case law permits a decrease in technical rates
On unilateral basis for non planned future premiums
For stocks when agreed with the subscribing association regarding collective contracts
7 23/01/2017
Technical rates are decreasing through time
Research Directorate – Dominique Durant 8 23/01/2017
Commitments embedded in individual contracts
Perimeter : TOP 12
Contractual commitments often specified in % of the financial incomes
Represent 0,5 points of % in 2015 for the main insurers
Less relevant when explaning the bonus rate than the regulatory profit
sharing minimum requirement which is defined globally (see next slide)
Research Directorate – Dominique Durant
Obligation to distribute within 8 years 90 % of the technical balance if it is positive and 85
% of the financial incomes once deducted the technical interests
The insurer has several options:
realizing capital gains or losses on securities with variable income to increase or reduce the
financial incomes
distributing immediately or increasing the profit-sharing provision that has to be distributed to
policy holders within 8 years
The sum of the bonus rate and the allocation to profit-sharing provision is superior or
equal to the minimum profit-sharing for all the insurers
9 23/01/2017
The profit sharing minimum requirements is easily
respected
Perimeter : TOP 12
Research Directorate – Dominique Durant 10 23/01/2017
Interaction between return on assets and profit-
sharing
Perimeter : TOP 12
4.20 4.09 3.99 3.923.61
3.29 3.09 3.052.82
2.59
0.31 0.32
-0.43
0.30
0.18
-0.66
0.26 0.380.39
0.57
5.13
5.50
4.444.18
4.02
3.02
3.57 3.623.46 3.43
-1
0
1
2
3
4
5
6
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Policyholder rate Net allocation to profit sharing reserve Investment Return Rate
Pol icyholders'
earnings-sharing
Due to realized holding gains, the margin between return on assets and profit
sharing is stable
Insurers distribute less and increase the profit-sharing provision
Research Directorate – Dominique Durant 11 23/01/2017
Interactions between return on assets and profit-
sharing
Perimeter : TOP 12
A significant part of realised holding gains is used for increasing the profit
sharing provision
Research Directorate – Dominique Durant
A high level of economic wealth
12 23/01/2017
Unrealized gains on bonds are significant since 2014 but aren’t available for
participation rate because they are put into the “capitalisation reserve”.
The “capitalisation reserve” increases since 2013: it can only decrease when
holding losses are realized on bonds
The profit-sharing provision rises since 2011 : 70% are allocated in the current
year and 19% in the previous year. Few amounts have to be distributed due to the
8 year limit
Unrealized gains on variable-income securities are volatile
Perimeter : TOP 12
Research Directorate – Dominique Durant
The reinvestment of (amortizing) fixed rate bonds maturing and the investment of the new net
inflows into (amortizing) bonds with a fixed rate coupon of 0% reduce the return on
investment by circa 20 bps every year
The new inflows have a marginal impact on the return on assets
13 23/01/2017
*
Forward-looking: projection of return on investments
Main results
Return on investments projection for the aggregated 16 main French life insurers (in %)
(in %)
4,25
3,64
3,12
3,30
2,52
2,21
1,64
0,83
4,27 4,05 3,93
3,01
3,48 3,58 3,36 3,38
0,33
- - - - - - - -
3,07 2,95 2,73
2,52 2,36
2,17 1,99
1,81 1,67
1,51
3,07 2,94
2,71 2,49
2,32 2,13
1,95 1,78
1,64 1,48
3,69
3,43
3,04
1,44
1,19
0,91
0,00
1,00
2,00
3,00
4,00
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
10 year gov. Bond rate (historical)
Investment return rate (realised)
10 year gov. bond rate scenario
Investment return rate (projected with no net inflows)
Investment return rate (projected)
Amortising bonds with fixed rate coupon: invest. income (excl. invest. fees) divided by the mean of opening and closing net book values
Research Directorate – Dominique Durant
projecting the investment return rates stemming from the investments excluding the unit-
linked contracts assets
over a period of 10 years
With a 10-year French government bonds rate of 0% over the projection period
Considering two-type of assets i: amortising bonds with fixed coupon rate and other assets
the definition of investment return rate is:
Based on end-2014 security by security porfolio : list and characteristics of assets (directly)
held by the insurer sourced from the annual regulatory reporting template « Tableau
Complémentaire à l’État des Placements »)
Could be done with S02.06, eventually complemented with CSDB
14 23/01/2017
*
Forward-looking: projection of return on investments Methodology: main features
Investment return of asset i in year 𝑛 =accounting investment income of assets i in 𝑛
12 ∗ (opening net book value of assets i in 𝑛 + closing net book value of assets i in 𝑛)
Research Directorate – Dominique Durant
Forward-looking: projection of return on investments Methodology: assumption about investment of inflows
15
Reinvestment of fixed income amortizing bonds maturing in the same type of assets
Reinvestment of revenue stream generated by assets in portfolio: the cash flows (coupons,
redemption price, dividends, rents, etc.) are invested in the same type of asset they stem
from
Investment of net annual premium:
• Two scenarios: a zero annual premium or a net annual inflows equal to the realized
net inflows in non-UL contracts over 2016 first semester, multiplied by 2 (calculation in
Aug.16) – it is assumed stable over the projection period and is different for each
insurers
• Investment separated between the two asset types in proportion of their opening net
book value
• Negative net annual premiums in a year is deduced from other inflows
New securities investments:
• In 10-year government amortizing bonds with fixed coupon rate of 0%, bought at par
value (therefore their coupon is equal to their actuarial rate or return and they have a
constant net book value)
• In other assets with the same characteristics as those in portfolio (investment income
and net book value)
No sales and rebalancing of assets in portfolio
23/01/2017
Research Directorate – Dominique Durant
Forward-looking: projection of return on investments Methodology: projecting book value of assets and investment income
16
Closing net book value in year 𝑛 = Coupon
1 + actuarial rate of return 𝑘−𝑛 years 𝑘∶n+1 to m
+Redemption price
(1 + actuarial rate of return)𝑚−𝑛
Amortising bonds with fixed coupon rate
Available data for each bond security:
•Net book value
•Redemption price
•Coupon rate
•Maturity date (retrieved by ACPR)
Under these assumptions, available information allows to project the (certain) investment income and net book
value of initial assets held and new assets invested in 0% 10-year bonds
For an amortising bond with fixed yearly Coupon paid on the 31/12, maturing on 31/12/m,
Other assets
Includes amortising bonds with variable coupon rate and non amortising assets (equities, property, etc.)
Assumptions: no sales, no depreciation, invest. income generated only by revenue stream, constant net book value
∝ being the mean of the estimated assets revenues in proportion of the net opening net book value in years 2014-2015 ∝ is insurer specific and stable along the whole projection period
Actuarial rate of return (yield-to-maturity)
Investment income𝑒𝑥𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡𝑠 in 𝑛 =∝ × closing net book value in 𝑛 − 1
Assumptions:
• non identified credit event
• bonds held-to-maturity
Investment income𝑒𝑥𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡𝑠 in 𝑛 = actuarial rate of return × closing net book value in 𝑛 − 1
23/01/2017
• Under French accounting standards, non UL contracts assets are recorded at historical cost
and are eventually amortized or depreciated. In particular, « amortizing assets » (i.e. bonds
with known maturity date) are amortized, and depreciated when the issuer is considered to
carry an identified credit risk
Research Directorate – Dominique Durant
Forward-looking: projection of return on investments Methodology: treatment of investment costs
17
Investment costs as a proportion of the investment income is assumed to be constant
over the projection period (equal to its mean over 2014 and 2015)
Investment return of the portfolio over the projection period is given by:
• the projected investment income excluding investment costs of the amortising
bonds with fixed rate coupon and of the other assets,
• Less the assumption on investment costs.
Investment income in year 𝑛 = investment incomeexcluding investment 𝑐𝑜𝑠𝑡𝑠in 𝑛 + investment costs in 𝑛
=investment incomeexcluding investment costs in 𝑛
1 − investment costs in 𝑛investment income in 𝑛
23/01/2017
Research Directorate – Dominique Durant
Share of amortising bonds with fixed rate coupon nearly stable over the projection
period
67,0
64,7 64,9 65,0 65,1 65,0 64,9 64,7 64,4 64,1 63,7 63,3
67,0
64,7 64,9 65,0 65,1 65,0 64,9 64,7 64,5 64,2 63,8 63,3
50
60
70
80
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Standard scenario No net inflows
18
*
Forward-looking: projection of return on investments Results – main numerical assumptions
Share of amortising bonds with fixed rate coupon
of the aggregated top 16 French life insurers (in %)
* realised
* *
Main numerical
assumptions for the top
16
Projection period
2015 2016-2024
Net annual inflows (in billion
euro): 7,28 9,12
Annual revenues of other
assets in proportion to their
opening net book value (in
%):
2,92 2,95
Share of investments fees in
the annual investment
income of all assets (in %):
-9,77 -9,35
Main numerical assumptions of top 16
Note: 2015 figures are known at the time of calculation
23/01/2017
Research Directorate – Dominique Durant
Each of the 16 main life insurers are concerned by the drop
19
*
Forward-looking: investment return rate projection Results
Investment return rates projected for the 16 main French life insurers (in %)
2,21
1,64
0,83
0,33
3,58 3,36 3,38
3,07 2,94
2,71 2,49
2,32 2,13
1,95 1,78
1,64 1,48
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
4,00
4,50
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
10 year gov. Bond rate (historical) 10 year gov. bond rate scenario Top 16 (realised) Top 16
A B C D
E F G H
I J K L
M N O P
23/01/2017
Research Directorate – Dominique Durant
ESRB proposals to improve insurers’ resilience :
The solvency II framework needs to be revised : especially UFR (Ultimate Forward
Rate),
The necessity of adopting macro-prudential tools should also be explored : e.g.
reviewing the minimum guaranteed rate, no dividend distribution even before breach
of the SCR, discretionary benefits reduction, etc.
Japanese failures in the 90s leaded to many reforms of Insurance
Business Act :
Failures due to high guaranteed rates, competition fro high revaluation, fall in asset
values
Introduction of a solvency ratio more comprehensive and risk-sensitive-based
The possibility of revising guaranteed rates downward for insurers in difficulty
A regulatory framework establishing a declining discount rate depending on the
subscription date (from 2,75 % in 1998 to 1,5 % in 2001)
In Germany:
Decrease in maximum technical interest (1,25 % for 2016) for new contracts.
limitations in the participation of policyholders in the reserves of revaluation, limitation
in dividends
the insurers have to complete reserves at the level of the technical reserves
discounted with the current interest rate.
20 23/01/2017
Some macro-prudential measures abroad
Research Directorate – Dominique Durant
Take measures on the whole sector to face emergency situations
Purposes : protect the interest of the policyholders in case of significant threat on
insurers, especially in case of sharp increase in interest rates
Proposed solutions : the law Sapin II (article 49) allows macro-prudential national
authority (the Haut conseil de stabilité financière - HCSF) for 3 renewable months to:
Limit temporarily the activity
Suspend the availability of assets
Suspend the redemptions and the arbitrages
Limit the payment of dividends
Invite the insurers to increase provision today
Purpose : increase provision instead of bonus rate with the current high return on
investment. This provision will be released when the return on investment will become
lower than the commitments or when the market interest rates will increase
Proposed solutions:
The law Sapin II (article 49) allows the HCSF to modulate the rules of constitution and release of the profit-sharing provision
Discussion about creating a reserve which would reduce the net profits on investment and thus the profit-sharing contractual commitments and could be used to cover losses due to high technical interests
21 23/01/2017
Macro-prudential measures foreseen in France
Research Directorate – Dominique Durant
Constraints:
No regulated rates
Allocation to profit-sharing provision, if constrained, should not result in a loss for
individual insurers
Options:
an ad-hoc reserve that would be deducted from the financial income would reduce
amounts distributable by contractual commitments and could cover losses due to an
excess of technical interest : it could thus provide additional room for manœuvre to
some insurers
In the event of rising interest rates, the reversibility of the measure can be obtained
either by a temporary decision of HCSF, or a formula for the calculation integrating
the reversibility
Sensitive points:
To show pedagogy is necessary in order to prevent surrenders
The measures have to fulfil consumer protection rules
22 23/01/2017
How to set a provision?
Research Directorate – Dominique Durant
To make policyholders and insurers understand that past participation rates
are not sustainable in the long run with the current interest rates level while:
The return on investments and the capital gains remain at comfortable level today
Insurers are in very different situations in terms of guaranteed rates, contractual
clauses, investment return and level of economic wealth
The competition limits the decrease in revaluation
→ A choice to be made between binding rules or responsibilities of insurers?
Find the balance between long term solvency for the insurers and interest of
the policyholders and fulfilment of the contractual commitments:
The case law defined rules regarding revision of the guaranteed rates and contractual
commitments
A suitable information of the policyholders about the less profitable or more risky new
products is essential
→ Find the right balance between micro-prudential supervision, financial
stability and consumer protection
23 23/01/2017
What is at stake?