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PARIS-The victory of a Socialist-led coalition in the French legislative elections earlier this month has left the insurance industry concerned about financial burdens and restriction of its ability to expand into private pension and health care products.
The Socialists have made economic pledges that ultimately are contradictory, such as promising to create jobs while increasing the minimum wage. During the campaign, the new government also pledged to curtail the private pension fund legislation introduced under the previous administration and to cut back on the privatization program. The latter pledge leaves a question mark over the future of troubled Paris-based insurer Groupe des Assurances Nationales.
Insurers in France could be badly affected by the new government's policy on employment. There have been suggestions by Socialist leaders since the elections that they may prevent employers from trimming staff.
"This will have a major effect on insurance mergers such as UAP-AXA and Assurances Generales de France with GAN. The success of these relies on cutting costs through reducing staff," said Michael Lindsay, an insurance analyst at investment house Lehmann Brothers in London.
The AXA-UAP merger produced a combined French workforce of some 55,000. The merged company was seeking to cut this by 10% at least, Mr. Lindsay said. In addition, AGF's plans to purchase the insurance operations of GAN may fall through if the former is unable to cut costs by trimming the staff.
The principal election pledge of the new government was to increase employment. France's unemployment rate is 13%, according to government statistics, but the real unemployment figure could be 2% or 3% higher, according to analysts. France has one of Europe's highest payroll taxes and a very high minimum wage of 6,000 francs ($1,030) per month.
The new government has said that it will create 700,000 new jobs over the next five years, half in the public sector and half in the private sector; cut the workweek from 38 hours to 35 hours; and increase the minimum wage.
"How can you force the private sector to employ people it does not want?" asks Claude Vela, managing director of the Paris office of Buck Consultants. Even if the government provides tax incentives to persuade businesses to keep people, "it will have a bad effect on the economy at large. It's a way of disguising unemployment. Instead of having people unemployed outside, you have them unemployed inside," Mr. Vela said.
The government's need for resources could persuade it to backtrack on its pledge to halt future privatizations, which include the sale of GAN and its banking affiliate Credit Industriel du Commerce, but there are doubts as to how far it will be able to maneuver.
"Privatization either won't happen or will be severely delayed," according to Nicholas Davenport, managing director of Willis Corroon France in Paris. Mr. Davenport noted that the Socialists do not have an outright majority in the National Assembly and must govern in coalition with the Communist and Green Parties. For now, the future of GAN lies in the hands of the European Commission, which is examining a 20 billion franc ($3.43 billion) recapitalization by the government. The Commission is due to issue its ruling on the recapitalization by June 20, says Jean-Jacques Bonnaud, former chairman of GAN who resigned from his post last October. A "yes" from Brussels means that the bailout also can be approved by shareholders at a planned general assembly on June 30.
"If Brussels does not give its approval, then GAN will have 8 billion francs ($1.37 billion) of assets. This is enough if it stays as a public sector company, because there is an unwritten (government) guarantee," Mr. Bonnaud said.
He said he doesn't expect an announcement on the future of GAN until August or possibly September.
The future of the previous government's private pensions legislation is another hot topic for debate.
"The most important issue is whether the new government goes on to apply the pension law," Mr. Bonnaud said.
Legislation to set up funded private pension plans was approved by both houses of the French Parliament. But side regulations to implement the law have not been issued, so the legislation is not yet in effect. And in a June 3 radio interview, the new prime minister, Lionel Jospin, said that his government would repeal the legislation.
"The (pension funds) project is probably stalled for a long time," said Mr. Vela.
Insurers expect the strict ideologues of the left in the new government to fight the creation of pension funds on a point of principle ingrained in the French.
"This is the principle of solidarity between generations," says Mr. Davenport. This means that the current workforce pays for the pensions of current retirees, rather than each individual saving for his or her own pension. "Everyone gets poor together," Mr. Davenport said.
"Pension funds on the Anglo-Saxon model are deemed to harm the power of the Caisses de Retraite" retirement funds, said Mr. Bonnaud. The Caisses de Retraite are pay-as-you-go retirement plans that are run jointly by the labor unions and the French employers federation, Confederation Nationale du Patronat Francais. There are about 600 of these in existence, covering certain professions or certain labor unions, and employing mainly labor union officials among their 3,000 directors. The Caisses "have found an ideological reason to oppose pension funds. They say that if pensions are based on individual savings or individual companies, then they will cause inequality among the savers," Mr. Bonnaud said.
France still has to address its looming state pension deficit. "The pension situation in France is a catastrophe in the making," said Mr. Davenport.
The solution so far advanced from the Socialist coalition and the retirement funds is to levy more charges on employers. "The Caisses de Retraite have advocated that it is better to impose additional charges on employers to meet the deficits. But this will make unemployment even worse," said Mr. Bonnaud "The debate about pension funds has been won intellectually, but there will a big (political) fight to delay its application."
Insurance companies that have been planning to take advantage of the pension legislation may have to change their plans, at least for the short term.
"They will have to try some creative fiscal engineering to develop a new product which will look like a pension fund but without the name. We are looking at this as inevitable," says Mr. Vela.
But a draft European directive that still has to be approved by E.U. member states, advocating the free sale of pensions within the European Union, could harm French insurers even further, as foreign companies could sell pensions to the French market while French firms would not be able to compete, Mr. Bonnaud said. "So it is clear" that the debate about pensions "is a stupid debate," he said.
Proposals of insurers such as AXA-UAP to develop private health care plans are also in doubt.
In France, health care costs over and above the level covered by the state social security system are insured through mutual companies, many of which are controlled by labor unions. Private sector insurers sell group health policies to companies, but they are subject to a 7% charge on premiums while the mutuals are exempt.
"When a company signs a group health insurance contract, it has to have the formal agreement of its labor union," said Mr. Bonnaud. So inevitably the unions choose a mutual insurer where unions are represented on its board of directors.
Mutual insurers hold 70% of the health care market, while private sector companies hold the remaining 30%.
Not everyone in the industry seems concerned about the election of a left-wing government.
"When the Socialists were elected in 1981 everyone was worried," remembers Patrick Lucas, chairman of Paris-based Gras Savoye & Co. This was the first government of Socialist President Francois Mitterrand, which immediately nationalized banks and insurance companies.
"But that was 16 years ago and my business has continued to grow," Mr. Lucas says. "We would like to see better economic growth. I cannot see why with this government we will have a different growth," he said.
Mr. Davenport would welcome more growth.
"We would like to see some stimulation to the economy. Companies have cut back on consultancy budgets and risk management budgets. Our business has never suffered from inflation, but a little less deflation would be welcome," he said.