The Insurance code allows this as an accessory function and under certain conditions. This is the state of play today.
Early this year, a 2011 trend is being confirmed: mortgage credit is becoming scarcer and more expensive. Caught between the tightening of prudential ratios ( within the framework in particular of the ongoing implementation of Basle 111) and the imminent maturation of many loans, banks are reducing their balance sheets conducting arbitrages or reducing funding - in particular of real estate - in unprecedented proportions.
Observers saw the emergence of an alternative source of financing : Insurance companies. In fact, unlike the banks, mortgages are, for these companies, a source of asset diversification. Firstly from a performance perspective: faced with low-paying bond markets they are encouraged to diversify their commitments to other regulated assets whose risk profile, return and maturity date are similar. Mortgages are exactly this.
The implementation of Solvency 2, taking effect towards the end of 2012 which aims at tightening the capital requirements of insurance companies, puts the asset allocation policies of these companies under pressure and encourages them to become more involved in the commercial real estate market which is less capital intensive than other asset classes representative of life Insurance companies core business.
As insurance companies already have real estate on their books, they are benefitting from internal expertise needed to analyse the underlying asset (real estate) in terms of location, maintenance that has been carried out or is still to be done as well as to select the best risk/return profile.
An insurance company is not a bank and the Insurance Code does not allow it to grant loans unless they are limited in comparison to all its total activities. On the other hand, the company would still be subject to the same rules which are applicable to credit bureaus and in particular to the requirement to obtain a banking licence - via a dedicated structure - which, not only takes between 9 months to a year to obtain, and is also very technical and labour intensive, would also subject the company to exigent prudential regulations ( including the Basle 111 regulations which are presently undergoing implementation). Certain Insurance companies have already made this choice.
In addition, the Insurance Code anticipates that an Insurance Company cannot agree to a mortgage loan unless it is guaranteed by a first mortgage which represents no more than 65% of the market value of the property, estimated on the day that the loan contract is concluded. (article R332-12 of the Insurance Code) The ceiling of mortgage security, will necessarily mean to limit, in equivalent proportions, leverage (loan to value) of the funding provided. The borrower will have to provide, up front, substantial capital or find other finance.
Another limitation, Insurance companies are not permitted to intervene as mediator or advisor to the borrower - an activity which does not formally fall within the ambit of operation of Insurance companies. This means that the "insurance lender" will only intervene as part of a syndicate ("club deal") established with one or more credit institutions.
Even if the insurance company does not act as a mediator, it will have considerable weight as far as funding is concerned and, as a result, must meet all requirements and restrictions in terms of profitability and guaranties.
This move of insurance towards banking, which is becoming more evident, is made easy by the existence of a common regulator: The Prudential control Authority PCA. This Authority came about as a result of a merger between the Controlling Authority of Insurance Companies and Mutual Funds and the Committee of Insurance Companies and Credit Institutions and Investment firms. It should help promote exchanges with authorities over the activities of insurers and banks and could lead to a greater flexibility on the intermediation of banking operations.
