Holger Gaserow assesses the many challenges facing the German insurance market as it approaches the 2004 renewal season.

A number of factors have had an influence on the German insurance market during the course of this year.

Lower investment returns have forced insurers to look for better underwriting results and German life insurers in particular are facing huge problems due to the challenging investment market. Insurers in the property/casualty market are now focusing on pricing, since there are fewer investment opportunities to offset poor technical results.

In terms of reinsurance and primary capacities, the withdrawal of Gerling Global Re from the market and the downgrading of its parent, Gerling Konzern Allgemeine (GKA) have created a number of challenges. However, GKA has now received financial support as a result of capital investments from several large German industrial companies.

The market has seen rates continue to rise in 2003, particularly in the areas of industrial property and liability insurance.

While the specific exclusion of liability risks such as asbestos and genetically modified organisms has rankled buyers, insurers are still following the lead of their reinsurers.

Consolidations would appear to be on the cards, with a number of the leading `public legal insurers', particularly in the property sector, currently in discussions regarding possible mergers. It is anticipated that Gebäudeversicherung Stuttgart and Sparkassenversicherung Wiesbaden will merge in the near future. In addition, a further public legal company is at present considering the purchase of Feuersozietät Berlin.

Discussions are also ongoing into the possibility of implementing compulsory insurance for natural perils, in light of the floods of August 2002. Such a move would have a dramatic impact on the composition of property business for each individual insurer.

Fire improvement measuresThe improvement measures strategy course put in place by insurers in 2002 has already made strong progress. This is likely to result in either a stabilisation in pricing and conditions or perhaps a slight increase for some particular risks. Insurance `at a high level' is still available.

In the case of natural perils, and in particular storm/hail and flood, there will be further price increases. In addition those providing cover are becoming more selective, and it will only be offered following a detailed assessment. High limits are become increasingly scarce and, for those which are available, these are restricted to named insured locations only.

However, there will be no further large waves of improvement measures. In the case of certain risk groups, some insurers have enforced a general underwriting ban, for example on wood processing or recycling. Only with a great deal of effort will it be possible to achieve complete coverage for such risks. Insurers are also issuing detailed demands for fire protection and are increasingly bringing their weight to bear on the policyholders to ensure that these demands are met.

The improvement measures are resulting in a marked increase in deductibles, in particular in relation to large industrials. This year the market developments will also make themselves felt in the medium-sized sector.

Overall, 2004 renewals will see a stabilising in pricing and only in 2005 can a softening in rates be expected.

German motor market There does not appear to have been any visible uniformity in the activities of motor insurers during 2003. The last twelve months have seen some insurers introduces rate increases for new and replacement business, All insurers will introduce rating adjustments at 1 January 2004 for business in force. It is expected that, due to the adjustments in the no-claims bonus categories alone, these increases will exceed 4%.

The beginning of next year will also see a review of the motorcar categories tariff. During the first half of 2003 there was a dramatic reduction in the number of road deaths, which fell to approximately 3,000 from 6,842 in 2002.

Reinsurers continue to insist on a limit of ¤50m for motor liability policies. For policies currently in force which are still running with unlimited cover, insurers will have to face reinsurance rate increases on their top layers of XL protections. The working layers will also see pricing and retention level adjustments.

Discussions are on-going as to the feasibility of introducing a compulsory insurance against natural perils. This is intended primarily to protect public authorities from having to cope with the massive costs of natural catastrophes such as those which resulted from the floods of August 2002.

Currently there are a number of schemes under consideration. However, while some insurers are keen to restrict the compulsory insurance to flood and earthquake risks, others are totally opposed to implementing any form of compulsory natural perils initiative.

A conference of the German Federal State leaders in November 2003 will decide whether the introduction goes ahead or not. If they find in favour of the insurance proposal, the industry could be in a position to offer natural perils insurance in the next year or two.

The Gerling caseThe British authority for financial supervision, the Financial Services Authority, has agreed to the sale of Gerling Global Re to the former CEO of ERC Frankona, Achim Kann, and other investors. The New York Insurance Department has also announced that it will give its approval. Permission from both authorities is a prerequisite to the separation of Gerling Global Re from Gerling Konzern. The sale is also a prerequisite of any improvement in the rating of the industrial insurer Gerling Konzern Allgemeine (GKA).

Following the investments made by various large German industrial corporations into GKA (more than ¤130m of fresh capital, of which ¤62.5m is legally binding), Standard & Poor's minimum capital requirements for an improved rating have been met. As a result, Standard & Poor's has upgraded the GKA rating from `BB+' to `BBB-' with a positive outlook. GKA is now in a stronger position to maintain and expand its business at renewal.

Standard & Poor's recently downgraded Munich Re's financial strength rating from `AA-' to `A+' with a stable outlook. Several other major global reinsurers remain on negative outlook and may be downgraded in the coming weeks and months. Munich Re's current strategy, which was implemented at the beginning of 2003, is to strengthen its capital position to an `AA' rating by the end of 2004. The steps necessary to achieve this rating rise will include a further improvement in underwriting earnings.

The issue of insurance financial strength ratings is a hot topic across the industry at present, with practitioners keen to see a greater degree of transparency in the rating process, bearing in mind that rating agencies do play an increasingly important role.

Life: Mannheimer Leben Last year, the rescue company Protektor was set up in response to pressure exercised by the Federation of the German Insurance Industry (GDV) on the German Federal Body for Financial Services Supervision (BaFin).

This year the German insurance industry has had to provide more than ¤340m for Protektor. This figure includes the �m-�m which Protektor has granted to the Mannheimer Holding as a loan to enable it to repair the hole in Mannheimer Leben's balance sheet. At present, Protektor is taking over the contracts and capital investments of Mannheimer Leben. It is reported that around 350,000 contracts will have been transfered by the end of September. In three to five years, Protektor is to transfer the contract portfolios to a "reliable life insurer".

As the German market approaches the coming renewal season, the challenges it faces, both at primary and reinsurance level, will require strong professional advice and guidance to gain the best deal in a significantly changing market. Holger Gaserow is the CEO of Aon Rück.