Abstract: Oliver B[ddot{a}]te Restructuring and consolidation are just beginning: Insurers will have to redefine their way of doing business The German life insurance industry--Europe's third largest, with more than 85 million policies in force and annual premium income of $57 billion--faces hard times. Since the mid-1990s, gross margins and profits have been dropping steadily. More recently, premium income in major growth segments has started to decline as well. Whole-life insurance, the industry's stalwart, has been hardest hit: new business has been ebbing continually, and the total number of current policies has fallen. Indeed, benefit payments on expiring policies can no longer be covered by premium income in this line. These developments are starting to hurt the industry-wide return on equity, which for all German life insurers has fallen from 27.2 percent in 1986 to 21.7 percent in 1997. At the same time, Germany's upward of 80 life insurance companies have found themselves increasingly entangled in a brutal damn-the-torpedoes competition for market share. Meanwhile, new market players such as banks, mutual funds, and securities brokers have become more than eager to enter the fray. Faced with all-out competition from within and without, the country's life insurers have come under increasing pressure to restructure and consolidate. With entrance barriers to the protected German life insurance market gradually disappearing, strong and entrepreneurial financial services providers--domestic or foreign--are likely to benefit most from the industry's rising wave of mergers, acquisitions, and strategic alliances. Given the sheer size of the German market and its comparatively low penetration in terms of per capita insurance, it might easily become one of the hottest and most contested in Europe (Exhibit 1). In this process of stormy change, not only life insurance as a product but also the industry itself will be redefined and transformed. To accommodate the new environment, traditional life insurers must recast their value propositions. Three strategic options are beginning to emerge: striving for economies of scale in the existing business, becoming a global asset manager, and specializing in individual risk management. Has the product outlived its usefulness? Almost 56 percent of Germany's people have at least one whole-life insurance policy. [1] The unquestionable market success of the product can be ascribed to three factors: its role as the sole widely available and safe option to provide for retirement, net returns that (because they are tax-exempt) are at least two percentage points higher than those of otherwise comparable investments, and the reliance of policyholders on advice from local insurance agents. In recent years, however, the leading position of whole-life insurance has clearly eroded. Since 1993, when the government decided to increase the tax-exempt percentage of interest income earned by savings accounts, most people in Germany have ceased to regard whole-life insurance as their only choice for capital formation. As after-tax income stagnates and the savings-to-income ratio keeps dropping--from about 13 percent in 1991 to 10.9 percent in 1997--savers have started considering alternative products that do not tie up capital for years on end. The increasing discontinuities of modern life--more frequent changes in business careers and lifestyles, higher divorce rates, the growing number of single-person households, and the end of lifetime employment--have also made ordinary whole-life insurance seem at odds with reality and spurred the move toward more flexible products. Why should 25- to 40-year-old customers buy an investment product that can't be modified as their lives evolve? To an extent that was previously unknown, moreover, the German public is taking an active interest in national and international finance. As people learn to make financial decisions in a more sophisticated way, with an awareness of differences in performance and returns, they will probably become even more dissatisfied with the disadvantages of traditional whole-life insurance. …
Publication Year: 1999
Publication Date: 1999-06-22
Language: en
Type: article
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