Aggressive underwriting and rising losses blamed for French local government insurance crisis

A new parliamentary report has blamed overly aggressive strategies from a dominant insurer that led to high market concentration, combined with rising losses from nat cats and civil unrest, for the current insurance crisis facing local governments in France.

The report was drafted by a Parliamentary commission set up by the French Senate to investigate why so many local municipalities have struggled to buy insurance at a time when exposures are on the rise.

The difficulties have come in the shape of sharp rates increases and higher deductibles demanded by insurers. A lack of capacity is also a huge concern, as a quarter of the local governments questioned by the commission said that no company bid on their insurance tenders in 2023. Others complained that insurers cancelled their policies in breach of tender conditions.

The survey with local government officials carried out by the commission found that the bigger the municipality, the bigger the problem. Four out of every ten governments at cities with 10,000 or more inhabitants said their relationship with their insurers strongly deteriorated in the past decade, while just over 30% said that it deteriorated a little. Two-thirds of municipalities with between 5,000 and 10,000 inhabitants said things had got worse, while the ratio was below 40% among the smallest towns.

The commission found out that the situation is particularly dire when it comes to property insurance programmes. The report says that significant levels of capacity have been withdrawn from the segment.

Premiums paid by local French governments hit €470m in 2017, but by the end of 2022 they were down to €385m, an 18% fall despite that fact that rates went up by 23% in the same period. The authors estimate that the number of contracts dropped from 100,000 in 2016 to 82,000 in 2022.

The report places the blame for the market crisis squarely on the shoulders of mutual insurer SMACL, which is focused on local government risks. The company is accused of having adopted an excessively aggressive strategy to become the market leader by premium volume, triggering a war on prices during the 2010s that created a very soft market.

As a result, several players left the French local government market, which is today limited, in practice, to two companies. These insures are Groupama, which focuses on towns with fewer than 10,000 inhabitants, and SMACL, which works with larger municipalities.

Over time, however, SMACL’s claims piled up and technical results quickly deteriorated. The company posted losses of €140m in 2022 and  €196m last year.

In January 2022, already in trouble, SMACL was rescued by MAIF, a group of mutual insurers, after an intervention by ACPR, France’s insurance market supervisor. Last year, the company received another financial boost from MAIF.

Such development are particularly unwelcome as French municipalities have had to deal with growing losses to facilities and urban infrastructure due to rising nat cat events and civil unrest. But the report argues that losses created by such events simply uncovered the insurance market’s underlying problems. It also stresses that all kinds of local governments have been affected by the poor market conditions.

The report proposes 15 measures to turn the local government market around by increasing competition while driving risk management standards.

For example, it urges France’s competition authorities to guarantee that buyers will benefit from a wider choice of insurers. It calls for education courses and other activities to develop risk management capabilities at local governments.

In this sense, Amrae, France’s risk management association, is doing its bit by preparing an online tool to help local government perform risk mapping exercises, the report notes. The tool, which will be accessed via the website www.lesrisquesdemacollectivite.fr, should be available by the end of June, sources told Commercial Risk Europe.

Officials in charge of insurance buying at local governments were asked about ideas to solve the current crisis, and one suggested that a mutual reinsurance captive could be created to facilitate risk transfer strategies for groups of local governments.

However, Alain Chrétien, the mayor of Vesoul, who is the vice-president of France’s association of mayors, discarded this idea, saying it is not clear whether local governments are legally allowed to set up captive companies.

One of the report’s recommendations, though, is to adapt risk transfer strategies by setting up deductibles that would enable insurers to focus on major risks, while local governments would be in charge of managing smaller exposures. This is the kind of strategy that would, at least in theory, work well with a captive.