Bertrand Labilloy, chief executive of French reinsurer Caisse Centrale de Réassurance, explains to Intelligent Insurer why CCR merits a state guarantee and the rationale behind launching the new CCR Re open market enterprise.
Government owned CCR operates with a state guarantee in the French market as it fulfills a public mission by reinsuring risk that would otherwise not be insurable, chief executive officer Bertrand Labilloy, tells Intelligent Insurer. Its major competitor SCOR, however, continues to contest the public scheme and its open market operations despite an approval by the European Commission.
In a legal action, French reinsurer SCOR objected to the exclusive nature of the French state’s backing of the CCR, saying that it gives the state reinsurer a virtual monopoly with a share of more than 90 percent of the French natural catastrophe reinsurance market.
“WHEN A CEDANT WANTS TO REINSURE WITH CCR EITHER THEY INSURE 100 PERCENT OF THEIR PORTFOLIO, OR THEY DON’T REINSURE WITH US. THEY CANNOT PICK AND CHOOSE.”
A ruling by the Paris administrative court in July required the French state to “terminate the agreement regarding the state’s guarantee of the CCR, insofar as the CCR’s natural catastrophe reinsurance business is concerned, within one year” or, failing this, to notify the European Commission (EC) of the natural catastrophe reinsurance scheme within the same time frame.
According to SCOR, which has been lobbying for the guarantee to be withdrawn for many years claiming it will open up the natural catastrophe reinsurance market in France, the Paris court has "formally acknowledged the existence of a State aid and reckoned that this State aid was illegal because the European Commission had not been notified of such aid."
"SCOR is promoting a real public/private partnership, such as the one that exists for Terrorism in France (Ex: Gareat), in which all the private-sector players (insurers & reinsurers) and the State would have a role and where the State intervention threshold would be increased when private capacities are exhausted. SCOR would provide some of the private-sector capacity that would be used to set up the new scheme," says Marie-Laurence Bouchon, head of group communications.
However, the European Commission approved both the principles and the terms of the natural disaster reinsurance scheme operated in France by CCR, according to a Sept. 26 CCR press release. In particular, the Commission approved the guarantee granted to CCR by the State in this capacity on an exclusive basis. The Commission considers that this guarantee does not constitute a State aid incompatible with the European internal market rules given that “the French natural disaster compensation system is proportionate” and that “it enables each household and business to be insured against these risks,” according to the press release.
SCOR continues to dispute that the State aid granted to the CCR is compatible with the internal market and intends to take recourse against the decision by the European Commission. There are other, cheaper and more efficient solutions to cover French people against natural catastrophes, which would guarantee the rights and obligations of all the players on this market, it argues in a press release following EC's decision.
CCR’s function is similar to the Flood Re scheme in the UK, which is also in conformity with European rules, Labilloy argues. “The French scheme is also designed to make non-insurable risk insurable. The difference between the two schemes is mainly that the UK system is financed by taxes, while the French system makes the less exposed parties finance the more exposed ones with their insurance premiums, allowing every party to pay the same bill.”
THE PUBLIC MODEL
Created in 1946, CCR operates as a public sector reinsurer in France and as a reinsurer in the open market offering cover in life, non-life and specialty lines in France and internationally.
The reinsurer reported €1.29 billion ($1.44 billion) in gross premium income for 2015, a decrease of 2.7 percent compared to 2014. Its net profit grew to €215.5 million from €193 million ($242 million from $216.7 million) over the period.
Examples of so-called uninsurable risks in France include war risks, nuclear risk and also natural catastrophe risk in the sense of offering continual coverage availability over time at affordable prices.
Labilloy says that from time to time business lines may not be insurable for short periods: “This was the case during the financial crisis for credit insurance and also for aviation insurance after 9/11,” he explains. In such cases the French government asks CCR to put in place coverage to allow the market to continue being protected through reinsurance.
The conditions that come with a state guarantee don’t suit a private reinsurer, CCR claims. "SCOR acts as if it would like to be a public reinsurer while remaining private, which does not work,” he notes. “They would like to get the guarantee of the state without abiding to the constraints imposed by the French government.”
One has to choose, he says. “As a private player you can select your clients, differentiate your tariffs according to their portfolios, enter or exit the market whenever you want, and change the terms and conditions from one year to another. As a public reinsurer we don’t differentiate between our clients, we offer stable terms and conditions and we are committed always to offer affordable cover to the market. These are two very different business models,” Labilloy explains.
“The public system works because it’s based on an anti-selection principle. When a cedant wants to reinsure with CCR either they insure 100 percent of their portfolio, or they don’t reinsure with us. They cannot pick and choose. This is the basis of solidarity in the French scheme,” he says.
When looking to buy natural disaster reinsurance in France, cedants are free to select CCR or any private reinsurer, he explains. CCR does not differentiate between cedants according to the quality of their portfolio and their exposure to natural disasters.
“A large part of our premiums come from proportional treaties and we offer the same terms and conditions to all cedants. This allows French insurers to apply the same tariffs to their clients which are set by the government to all policyholders, according to the law from 1982,” Labilloy says.
He does not think that CCR can offer lower rates in the French market due to the state guarantee.
“In the current market conditions we may even be slightly more expensive than competitors, but in other market conditions we may appear more attractive. Our rates are very stable and it’s part of our public mission to continually offer reinsurance capacity at affordable prices to the French market.”
The public mission also makes it easier for CCR to offer “unlimited guarantee coverage and stability of the terms and conditions over time” in the French market, Labilloy explains. He notes that the public scheme applies to French risk carried by insurers based in any geography. A foreign cedant operating in France can benefit from the public scheme under the same conditions as a French cedant, he says.
THE LAUNCH OF CCR RE
CCR also operates in the open market. This business, which is in the process of being separated into a legal entity called CCR Re and becoming a subsidiary of CCR, has its core markets in France, Germany, the UK, Canada, Israel, Japan and the MENA region. The unit will be operating from January 1, 2017.
CCR Re will be a 100 percent subsidiary of CCR with an economic capital of more than €750 million ($842 million) and a target solvency ratio of 200 percent. The unit represented 32 percent of CCR’s €1.29 billion ($1.44 billion) premium income as of 2015.
SCOR considers that the CCR and the State should in any event abstain from involvement in the coverage of natural catastrophes outside of France. The private reinsurer also contests the fact that CCR is able to pursue commercial activities in France and abroad. It is not the French State's role to take catastrophe risks in other countries, SCOR says in the press release. For its commercial activities, the CCR benefitted until now from the same rating as the French State. SCOR challenged this situation, and is "pleased to have obtained the subsidiarisation of the CCR's commercial activities, which has led to a downgrade of the Standard & Poor's rating attributed to these activities by 4 notches (from AA to A-)." This very significant rating difference shows the extent to which CCR benefitted from [state] aid over the past few years for its so-called commercial activities, according to SCOR.
The decision to move the open market business into a separate entity was partly driven by the competitive landscape and the soft market, Labilloy explains. After considering the pros and cons, management concluded that the advantages of being integrated did not justify the drawbacks.
“We could for example not have a separate and dedicated investment policy and we were also subject to a lot of constraints in terms of underwriting policy,” he says.
The two activities are very different and should therefore be managed separately, Labilloy notes. The public reinsurance part is a very short-term and volatile business with shares on treaties equalling 100 percent. The open market operation is a long-term business, including third party liability, and it is a low volatility business with recurrent, stable cash flows and also very low shares on treaties, he explains.
The legal separation will allow CCR to keep synergies with the open market business as the parent company will continue servicing CCR Re.
“The reason CCR is offering reinsurance in the open market is to benefit from synergies with the state-backed business,” Labilloy says. The new unit will, however, undergo a strategic refocusing.
“We are reducing the underwriting in business lines where rates are too low to cover the cost of risk, in particular with regard to quota share in fire insurance or third party liability in motor insurance, as the low interest rate environment is not sufficiently taken into account by the market for the latter.
“We aim to increase exposure on the life and the specialty sides of the business where there still exists some appropriate risk reward,” Labilloy says. In addition, CCR wants to improve its geographic diversification in terms of exposure to catastrophe risk.
“At the moment we have a high concentration of risk in Europe as well as Japan and Canada and we need to diversify these exposures,” Labilloy says.
CCR has no plans to expand the open market business and is in fact likely to reduce underwriting despite considering adding one or two markets to its portfolio.
“We are not planning to chase premiums. We might, as we did in the recent past, reduce underwriting by between 2 percent and 5 percent, depending on pricing,” Labilloy says.
Instead, CCR Re is set to focus on improving efficiency and processes and the quality of the underwriting in order to boost results while concentrating on specialty lines such as aviation and space, credit and warranty, terrorism and nuclear risks.
In addition, CCR is not planning to grow its state-backed French reinsurance business.
“We have already reviewed the terms and conditions for the natural disaster scheme with the cedants last year and for the future we will want to make sure we remain the most relevant possible by providing to our clients additional services in terms of information about exposure, about knowledge of risk and by providing public authorities help for catastrophe prevention.”
CCR, SCOR, Bertrand Labilloy, Europe, Natural Catastrophe, European Commission, Government Guarantee