New reforms push insurance companies' performance

by Jacques R. LORNE

People have been talking about these new reforms for quite a while, yet without exactly knowing what they are exactly. Indeed, the Douste-Blazy Law concerns health, the Fillon Law concerns companies through schemes of collectivization of wage and retirement savings… certainly it can all seem confusing. The national meeting of insurers, which took place in Marseille last June and touched on these different themes, proves that the subject is more than topical, as it will be affecting everyone soon. To find out more we met with Vincent Moreau, Regional Director of AGF, the group insurance specialists, so that he could try to explain the reforms as simply as possible, as they will, more or less, slowly change a number of things in our approach of basic schemes.

ASI : We need to talk about this much-discussed personal and retirement insurance reform, for do we really know what it is all about, what are the reasons for this reform, and what impact it shall provoke in terms of corporate and employee life ?

Vincent Moreau : Indeed, since 1985 the legislature has tried to go forward in the evolution of retirement schemes. There are two simple reasons for this. The first is completely economic. Indeed, we cannot, in the end, live with a constantly increasing population of retirees without buying power. It's the base of the argument: the population grows and their buying power must be maintained, if only for internal consumption, so the obligation is to find schemes that bring retirees enough buying power. Then there is the purely political point. Whatever the trends that may have come into play in the last thirty years, they have all searched for solutions in the same sense. So there is continuity in the strategy towards retirees, whether it is economic or political. The basic scheme, via distribution, is a system with great abilities to finance a part of the retirements, but it is imperative to go even further in the reforms in order to favour investment, on the one hand from employees and individuals, and on the other hand to give means to companies for helping their employees finance this type of scheme. We haven't ceased heading towards the improvement of deductibility schemes by trying to favour investment within this retirement scheme. This is why we had the Fillon Law, which is the latest law in force concerning retirement schemes, in tandem with the reactivation of an old scheme that wasn't exploited by the small companies, the "Wage savings system."

ASI : The widespread opening of this new outlook on retirement schemes, with its principles of shareholding and of investment and the consequent promotion, opens another vision of the marketing approach. It is an opportunity for the insurance companies, for they will have the power to get back to an active market. Are they aware of this ? How are they preparing for it ?

V. Moreau :Indeed, it is a new market, a bigger one, that is being discovered today, notably in terms of wage savings. For it's a fact, this detail was exploited very little in France. So, yes exactly, it is in this niche that we find an enormous part of the market to conquer, whether for the insurance companies or for the
bankers.

ASI : In order for the companies or the banks to be able to take on this market, one could suppose that there are particular measures, safeguards and constraints. What are these obligations, really, if they exist ?

V. Moreau : Exactly! We are on the purely financial part, in the retirement capital accumulation phase. What is important here is that the financial organism takes care of a part of this. They must be able to respect the commitments they have undertaken, that means being conscious of a sense of responsibility. By virtue of this fact, the section of the company that receives the funding assumes a relatively substantial importance in the sense of the potential to be able to respect its commitments. The characteristic of the insurance company is not only within its accumulation phase that it can possibly guarantee interests on what is called "its active workforce." This is a major commitment, for they need to have a real financial capacity to face up to tomorrow's potential market downturns, like we saw a few years ago. This is where the insurers clearly plays their role, the day of the retirement liquidation phase, for at this very moment the insurers shall fill their commitments through their ability to turn out the sums they must distribute. Indeed there are commitments to the life annuities, which imply that the insurance mechanism works to its maximum capacity. This is clearly an opportunity for insurance companies developing themselves around this market and also around the "wage savings scheme."

ASI : Is there a uniformity advocated by Europe for this type of procedure, or does each country have its own legislation on the subject ?

V. Moreau : Today there is no harmony on the European level, since in any case, insurance preserves its own base scheme, which is that of distribution. That's always been the will, and on the face of it, there is no reason for it to stop being that way, knowing that France was one of the nations whose basic scheme has been financed by the most developed solidarity scheme of generations. We cannot bring ourselves to the same level as compared with our European neighbours who have already capitalised pension funds, like Britain or Germany, which makes the development of retirement insurance a lot stronger in these countries than in France. Perhaps we'll catch up… it is evident that German companies spent the last fifty years capitalising on the retirement schemes in the insurance companies; we wouldn't be able to hit that level right away, knowing furthermore that the goal of the game is to not diminish the base scheme. The distribution scheme has its advantages and its disadvantages, it has its limits like financing problems by the economic system and by the fact that today we want to retire as early as possible, even if officially it is at 65 years of age, and there is also the fact that our life expectancy is longer than ever.

ASI : Despite all, hasn't a harmonisation begun with the intention of improving retirement by way of slowly abandoning the distribution scheme ?

V. Moreau : Surely the trend would be to say that in the end we would have more unified schemes in Europe. But before we get to the point of reducing the basic scheme to make it no longer the principal but the accessory scheme, in my opinion, we still have several decades to wait. In any case, the French particularities will be maintained in
comparison to our European
colleagues.

ASI : How, and until what point can such a scheme be maintained, when there is a significant demographic problem, and in light of the fact that people live longer ?

V. Moreau : Apart from the demographic problem itself, where indeed young people have to pay for the oldest people's retirement, there is an economic situation that is quite simple. If tomorrow you have a 10% increase with salaries growing at the same rate per year, financing a distribution scheme will be much easier. This scheme is closely linked with our economic activity. Today, retirement packages that were begun in favourable economic conditions must be paid out. People have acquired a significant amount of points because salaries rose (the rates given were from 8-16% with the B group and you had a free allocation for corresponding points from past periods). Currently we pay what was given at the time. However, there is going to be a certain amount of stabilisation, for today, they give less than twenty years ago; so in twenty years time we might have lesser costs to finance. If tomorrow's life expectancies reach 95 years of age and we work until we are 70, there also would be new balances to work out. In any case, it would be very expensive to get rid of the distribution scheme in France. A priori, there is not any other choice but to continue it, but it must be supplemented.

ASI : On the topic of the new retirement savings market established by the Fillon Law, it states that it will "give saving wage-earners a bigger stake in the company in the scheme of their retirement." What does that mean specifically ?

V. Moreau : It means that this law will allow companies to finance a part of the savings. From the moment where the company establishes the schemes, with the possibility of fiscal advantages and an exoneration of social fees, the company could help finance and then incite employees to pay themselves as well. In companies there was a mixture, on the fiscal level, which was to combine retirement, long-term savings, etc. Today, the new law clearly distinguishes things in black and white concerning the subject of retirement and corporate fiscal arrangements. It accentuates and maintains, in all aspects, the company's capacities for favouring wage savings, by having supplemented it with something big, the Comple-mentary Retirement Savings Plan (PERCO), whose goal is to finance schemes well, in order to give the wage-earner's retirement package a supplementary savings. It is a complementary scheme on the basic corporate level that has been around since the 1980s, which allows for an additional commitment from the company. The sole constraint is that instead of being available in five years, it becomes available upon retirement age, in the form of profit, or capital. It is a supplementary advantage for employees who, if they've put away some money for themselves, their employer has also contributed a good share as well.

ASI : The text also says that the company is the preferred location for the retirement savings. So, why and how, and what's in it for the company ?

V. Moreau : On the savings level the interest is that it enters into the framework of its social policy. The company that does not want to negotiate anything with its workers will not establish a corporate savings plan, not to even mention a PERCO plan. So this really has to be a company's will, plus their ability to negotiate, which consists of saying that besides the salaries paid, the company shall give its employees an advantage that it will partially pay, which thus lets the company's employees access the least expensive coverage. It's the same for retirement : the company can help finance the retirement of its wage-earners, who will be all the more motivated to work for this company because, thanks to the supplementary commitment on behalf of the company, there is a considerable amount of complementary revenue. If the company wants to make its investment profitable, it must have a strong communication strategy to convince its employees. They can even add a bonus in saying: "Our company cares for its employees. On top of their regular salary, we give them a retirement package as well."

ASI : So the company must establish communication, but besides that, aren't there some other interests, such as tax exemption, or other advantages?

V. Moreau : The establishment of a savings plan (PE) by an employer, apart from the fact that the law grants them the advantage of deductibility from the amounts invested by the company for improving wage-earners' retirements, and moreover that the company wouldn't pay corporate taxes on all of the payments delivered. But nevertheless, clearly the establishment of a PE or a PERCO plan, without efficient communication with employees explaining why - in what framework and what they should expect upon retiring - would be a dead loss for a company. So the idea is to say, "We'll finance employees' schemes and consider it as an investment." You cannot mention investment without bringing up the return on the investment. And the return on your investment with this type of scheme, whether a company retirement plan or staff provident scheme, can only be done through employee rises, while explaining the advantages offered to them within the company.

We could also go beyond any reasoning when the funds that supply the PE come from a profit-sharing scheme or from shareholding on the part of the company. Here, we are in a communication domain that goes beyond. It basically says, "The company's giving benefits, therefore participation options. You're helping improve our profitability, the company has established profit-sharing, and these sums are being put into a corporate savings plan." This third dimension combines retirement savings with the mechanism of participation and profit sharing. But that is nothing new. Joint holdings have always existed, apart from the fact the minimum is now 50 employees as opposed to 100 in the past.

ASI : What you are describing applies to large companies. Don't you think that small businesses may be isolated in this case and be unable to fulfill all these conditions, particularly concerning the financial arrangement, especially in an economic context that is not so favourable these days ?

V. Moreau : On the contrary, there is no limit. This is not just for big companies. They have often already established this type of system in the past, but it's important to realize that 90% of companies are much smaller, and now the legislation wants to revitalise this kind of product for even the smallest of companies, those with only five to ten employees. This new law will let non-salaried workers, that is heads of small businesses, merchants and freelancers, to improve their retirement packages themselves, through the PE or PERCO type of plans. It's a complementary key to try and accelerate the investment process on this type of service and it's conceived for small business. Today, each company will discover the advantages and the drawbacks.

ASI : How will the insurer be integrated into this system of communication, which seems indispensable for business ?

V. Moreau : This here is where we play the most significant role. Any banker or insurer can establish a corporate savings plan providing the legalities are respected and they have the financial capacity to offer reliable products. However, it is essential for the insurer to accompany the employer when it comes to implementing the product. We are the ones who must transform these costs into social investment and give it the mechanism to validate this action. Once the plan is underway, the company must be ready to implement it efficiently, because a corporate savings plan requires constant communication with the employees. We offer them this communication thanks to all the modern means, including Internet. To sum it up, we must assist the employer in order to make his system profitable.

ASI : You are facing competition from the banks, but what is the difference between an insurance company and a bank ? How does an employer make a choice ? What determines this choice ?

V. Moreau : The banker has a financial vision of the data, and often with the savings plan schemes, the employer would naturally be inclined to meet with his or her banker concerning the financial investment. To us, making a savings plan uniquely based on finance that is not linked with the whole vision of corporate social protection (Social with a capital "S", that which affects work stoppage, retirement, death…) means there's something missing. We claim to have this missing link, because we are truly capable of a global approach to the social aspects in business. But beware, we are not saying that we are "the all-round insurer." However, we can advise the employer in his or her choices. There is a significant whole approach here, and a direct link in the confines of the deductibility between retirement schemes, with this "Contrat chapeau" that will eventually be established with companies.

ASI : What is this "Contrat chapeau"?

V. Moreau : It's an agreement made between employees and company, stating essentially that "If you stay with this company until retirement, you will have a retirement package financed 100% by the company that would go on to pay you between 1 and 20% more of your salary after retirement." It is a benefit with another significant social aspect, that of building loyalty. All this merges into one global proposition.

ASI : How is it that the retirement market is still so hesitant, what are the reasons for this, and what needs to be done to accelerate it ?

V. Moreau : We have only just received all the decrees for the establishment of the schemes. It's important to know that the law is one thing but the mechanism of the decrees is another. So long as these decrees have not been applied, whether for the retirement part or today for health reform, there is nothing we can do. This delay always brings the establishment of a company's schemes to a halt. It's very administrative, but we are seeing the light at the end of the tunnel and it is now permitting us to know what we can and cannot do; we're going to be able to offer Inter-corporate and PERCO savings plans in particular, better adapted to the demand.

It's the same thing with health. There are always transition periods for allowing companies to establish adapted schemes in line with the new regulations, and it always causes delays. The merit of the Fillon Law is that it has made things move, and it has given the insurance companies free publicity. However, it was all done at the same time. Now it is up to us to sort things out with the employers, in order to measure what we can offer them. Because of this, the schemes got off to a difficult start and the wage-earner savings plans weren't yet common in France. Undoubtedly, there is a lack of information as well as a lack of establishment practice.

ASI : Do you now have all of the advantages to fulfill this "lack of establishment practice" ?

V. Moreau : We have practically all of the assets for establishing communication systems, to show employers what they can and cannot do, since all the application decrees are there, notably on the level of the fiscal threshold and URSSAF. So we will be able to really offer schemes to companies while being almost completely sure that there will not be any modification in terms of what has been decreed.

ASI : You who are "company" specialists, how do you comprehend this maze of information that all these offers make, and these fiscal complications which one cannot always grasp?

V. Moreau : There is one important thing that has come to France for the first time. To make it simple, the mechanism of the Fillon Law came to combine corporate taxation and that of the wage-earner, in that it is the wage-earner who, in his personal income tax return, shall mention any sums coming from contracts paid by the employer, and which contribute towards his or her individual deductibility in retirement packages - the famous 10% - this is totally new. In France there has always been an orderliness concerning taxation, to not mix that of business with that of employees. Here, everything is mixed ! That being said, whether it's the Douste-Blazy or the Fillon Law health reform, it's almost bliss for us, because the more it's complicated for the consumer, the more we have an important role to play in order to explain.

Concerning the purely insurance related part, the products stay the same. We still intend to develop retirement and wage savings schemes, and we announce it because there clearly is a market. We also want to maintain ourselves in health, whether individual or group care, but at the same time, we are going do a lot of work concerning our capabilities, our added value, which is to well-advise the company owner to take options on all of what's offered. At the AGF we insist on the fact that we must make offers easy to understand. The satisfaction of the final subscriber, the wage-earner, will satisfy the intermediary subscriber, the company ; that's precisely our role. Currently, through the assistance of our distributors, who are the general agents and brokers, we are making training kits available to the employers, and we go into the companies to accompany them and explain how the guarantees, contract results, costs, and everything else, functions and how to leverage it all…. We are always there to lend a hand to the employer. We even have Internet sites to show the information more dynamically and in a more current way. That's our constant pursuit. We can only do profitable development if, in addition to our basic trade which is to financially cover payments for disasters, we fully establish a functional system for company contracts. This is the goal of the game for us and it is crucial. Moreover, we have specifically established satisfaction surveys that cover all of the points and enable us to manage our customer service on every level, and we envision reinforcing our efforts even more for the handling of the 2006 files.

ASI : How could these types of schemes develop for insurers ?

V. Moreau : Today I think that the sky is the limit, for we are off on a very weak rate, less than 5% on the wage-earner savings, so there's plenty to do. Despite all, we are facing a highly competitive market and companies must also have the financial weight, we cannot forget this. On this market, we are hoping for a 5% minimum market share concerning retirement and wage-earner savings, but in volume of new business, we rank precisely among the first three leaders.

ASI : As AGF, do you have a product that you will particularly promote on this new market ?

V. Moreau : There are two paths concerning the AGF Collective. One, which is natural and which we are in the process of refining: wage-earner savings with the PERCO Plan, which we will continue to sell. However, the second, very strong path is in the traditional market, Health. It is a more difficult market but one which represents enormous potential. On this subject, we are also in the process of making up offers, standardised ones and customised ones, that stand apart, in order to be able to offer contracts to employers which satisfy the Douste-Blazy reform and the new deductibility regulations. Indeed, URSSAF is going to require that the corporate schemes be obligatory, so that the employer's part is not subject to social fees, which would change the deal. Also, there is an aspect that is slightly inflationary for expenses, and thus for the costs, because the price-setting is adapted to the company's costs. We also wish to give company owners the ability to not have to launch into disproportionate expenses and to provide them with schemes that have a quality/price permanence as well as to help validate the medical profession's sense of responsibility. For our goal is that we, as complementary forces, find products that respond to all the aspects required by the new reforms. That obliges us to constantly keep watch over the companies with whom we collaborate. The health offer is a major challenge for us, one that is opening up and on which we are counting for succeeding with the companies and their employees.