Herbert Fromme takes a look at a German market in turmoil.

The summer has been hot and dry; beer gardens were full, Germany came third in the Fifa World Cup - and German insurers and reinsurers emerged surprisingly well from the deep capital markets crisis of 2001 and 2002. They have made excellent profits in the last two years and most companies have regained their financial strength. Market leaders such as Allianz and Munich Re are continuing to expand internationally.

The market is not over-regulated - in fact, compared with the UK, demands on compliance are very low. Even the dreaded introduction of the Solvency II capital requirements, scheduled for around 2010, and the national version of the European Union's intermediaries directive are unlikely to change that.

So all is well in Germany in the summer of 2006, one might be tempted to think. But nothing would be further from the truth. In reality, the market is in turmoil and undergoing a period of profound change.

Allianz leads pack

This is most visible at Allianz, the German market leader and a global player with premium income of $122bn. CEO Michael Diekmann is putting the company through a rigorous restructuring programme. In Germany alone, a total of 5,700 of 30,700 full-time jobs will go, while the number of German insurance branch offices will fall from 21 to ten. The three main companies for property casualty, life and health have been merged into a new holding company, Allianz Deutschland AG (ADAG).

"We have been losing customers for years," Diekmann said. There were several reasons for that: unsatisfactory service; the fact that Allianz with its sales force of 12,000 tied agents is weaker in the cities than in the countryside (where the population is shrinking); and for 30% of customers, price.

So Diekmann has launched a cultural revolution. Next year a central call centre will take care of customers, a unified IT platform is to be introduced and the regional offices will lose much of their power. To rectify its urban weakness, Diekmann is pushing sales via the counters of subsidiary Dresdner Bank. The savings of EUR500m to EUR600m annually that the restructuring brings will help Allianz to be more flexible on pricing. And at the same time it is - despite hot opposition from its agents - introducing an internet sales channel.

The rebuilding of the German group was only possible since, starting in 2000, Allianz and Munich Re disentangled their web of joint ownerships, cross-shareholdings and other relationships.

But Diekmann is facing severe opposition from inside the group, from unions and politicians - who call his behaviour "immoral", as jobs are going despite an expected net profit of EUR5.5bn to EUR6bn in 2006. Reiner Hagemann, the highly respected head of the property casualty group, left at the end of 2005 because he disapproved of the changes. The unions are carrying out token strike actions and many local politicians are furious.

Why now?

It is easy to see why Diekmann is making changes. But it remains his secret why they have been introduced in one fell swoop and so publicly. For example, the job cuts could have come through natural wastage and would probably have only taken one more year. There are two possible answers. One: Diekmann wants to impress investors and analysts. Second: He wants to shock the whole organisation so everyone feels that something drastic is happening and cultural change - mainly when dealing with customers - can be implemented.

But this is not his only move. Diekmann is also changing the legal status of the overall holding company, Allianz AG, to a European joint stock company, or Societas Europaea (SE). At the same time, Allianz AG will be merged with its Italian subsidiary RAS. In this way, the new umbrella company Allianz SE will hold all the stakes in eastern European and south European group members currently controlled by RAS. RAS' operative insurance business will be moved to a subsidiary.

In Germany, the rest of the market is watching with fascination. Managers secretly admire the Allianz boss for tackling these issues. At the same time, they are also afraid. What happens if Allianz can bring down its cost ratio from the current 25% to, say 20% or 21%? Will they still be able to compete?

So, many are following suit and running their own cost-cutting programmes. Axa Germany has already started. One big difference: Axa is reducing its staff with a lot less noise and with a pact with the works council that there will be no sackings until 2012. Munich Re's primary outfit Ergo has restructured, Zurich Financial Services is doing the same and the takeover of Gerling by Talanx/HDI is costing another 2,000 jobs.

At the same time, some of the companies vying for Allianz' customer base are trying to take advantage of the changes. HUK-Coburg in particular, the number two insurer in the motor market, is hoping to gain from its rival's temporary weakness.

Allianz is also making changes to its industrial business. The old Allianz Marine and Aviation has been merged into Allianz Global Risks - now called Allianz Global Corporate & Specialties (AGCS), which expects EUR2.7bn premium income for 2006 and has some 2,500 staff. At the same time, it has changed its style. AGCS has become a primary risk carrier in its own right. Suggestions that this might be the first move by the Allianz top management to wriggle out of industrial business altogether have been vigorously denied.

In Germany, the new outfit faces intense competition from another operator. Gerling in Cologne has been taken over by the Hanover-based Talanx/HDI group. The merger of the number two and three insurers in the market - it was always disputed which was which - will make the new HDI Gerling so big that it will be on a par with Allianz. "It might even be that Talanx with Gerling is bigger than we are, at least with regard to industrial fire and liability and based on their individual premium income before the merger," said AGCS CEO Axel Theis. "If we include marine and aviation, however, we are bigger."

Merger concerns

Clients are worried about the HDI/Gerling merger. They fear an oligopoly and the loss of know-how. "The steps taken by Talanx are anything but in the interest of German industry," said Ralf Oelssner, head of insurance for Lufthansa and chairman of the risk managers and insurance buyers association, Deutsche Versicherungs-Schutzverband, an insurance lobby organisation for German industry.

Concern among Gerling customers was so strong that a group of pharmaceutical companies lodged a protest with the EU Commission, which still approved the merger. But it set the condition that one of the two withdrew from covering pharmaceutical liability risks. This was not what the complaining customers had wanted.

Christian Hinsch, management board member of Talanx and head of HDI, did his best to calm emotions down. At least for 2007, the insurance capacity provided by both companies will probably remain unchanged. HDI will withdraw from the pharma sector, but Gerling will be allowed to expand its capacity.

The whole restructuring wave sweeping through the market is not meeting with sympathy from large insurance buyers. They complain about the constant slimming-down of structures. Competent employees disappear suddenly, service is worsening and travel times increase.

Industrial insurance is not the biggest sector for the German industry, which clocked up premium income of EUR158bn in 2005, a rise of 3.8%. But it is important due to its flagship nature and because many trends start in this arena.

Industrial business is estimated to total EUR19bn; although precise statistics are not available. It has many players, including industrial companies as insurance buyers, captive brokers, the large brokers - Aon, Marsh, Ecclesia, Funk and Willis. And then there is a chorus of primary insurers - alongside market leaders Allianz and HDI/Gerling, there are Gothaer, Axa, AIG, ACE, FM Global and others. Then there are the reinsurers, which are increasingly dealing directly with industry. Things are further complicated by the fact that industrial groups have their own captive insurers and reinsurers.

Following massive underwriting losses in the 1990s, insurers have raised their prices dramatically. In the last four years, industrial insurance has once again become a very lucrative sector. But in 2005, things changed again. Providers are trying to gain market share and are ready to give way on prices. "In industrial fire insurance, premium income across the market had dropped by 7% at 1 January 2006," said HDI's CEO Christian Hinsch. Cover for natural hazards is becoming expensive for exposed companies, Hinsch believes. "In industrial liability insurance the prices could drop a little."

Lothar Riedle, head of German business for ACE group, which is based in Bermuda and the US, sees less pressure on insurers. "The extremely strong demand for premium reductions in 2005 appears to have lessened," he said. In liability, this is also balanced by the trend towards high sums insured. However, this is not true for D&O. This sector has "today the highest risk and danger potential for industrial insurers", says Riedle. In spite of new loss events, massive premium reductions are being demanded "and also being granted by the market".

Motor price war

The German property casualty market is on its way down in the cycle. But in 2005 and in the first half of 2006, combined ratios were excellent and profits from P/C were high. It is thus not surprising that companies are prepared to reduce prices to win more of the still profitable business. This is particularly true for motor, the largest P/C line at EUR22bn.

The current price war began back in 2005 by Allianz with a surprise attack on its rivals, reducing prices by more than 10% on average. The company had lost market share for years to aggressive competitors, especially a number of mutuals. But the Allianz move worked. In 2005, it managed to lift the number of insured vehicles from 8.79 million to 8.89 million, out of around 50 million on the German roads. HUK-Coburg also grew by some 1.5% to 7.53 million vehicles, but weakened in the run up to 2006, losing some 0.5% of its volume. It has since responded with another reduction in its tariff and has been making the most of its additional business with its internet-based subsidiary HUK 24. This was reason enough for Allianz to set up its internet motor channel - Allianz 24.


The reinsurance side of the market is also being restructured. Swiss Re's $8bn takeover of GE Insurance Solutions will lead to 2,000 job cuts. In Germany, the acquisition means the end of the old Frankona Re. Some 900 of the 11,500 Swiss Re workers are based in Germany, 400 come from GE Frankona. Rival Munich Re, which is now the number two reinsurer in the world, will not cut jobs - at the end of 2005 it had 3,365 staff in Germany and is increasing that in 2006. One of the most prominent newcomers is Ludger Arnoldussen, who had been CEO of Swiss Re Germany.

Again, the reduction in available carriers is causing some consternation among cedants, especially with the disappearance of Gerling Re in 2002. Scor and Converium, on the other hand, are back in business, convincing customers that their problems are now in the past. Scor even bought Revios, the life arm of former Gerling Re, for EUR665m.

Munich Re, meanwhile, has been enjoying excellent half-year figures. The company earned EUR2.13bn after tax, compared with EUR876m in the first half of 2005. Munich Re is maintaining its strict underwriting policy. Accordingly, original premium income in reinsurance fell by 2.1% in the first half. Only currency factors led to a slight 0.9% rise to EUR11.33bn.

Hannover Re, the fourth largest reinsurer in the world, also impressed with excellent half-year figures. And it made it clear that it is ready for expansion, mainly in life reinsurance. CEO Wilhelm Zeller has repeatedly stated that he is keen to acquire portfolios in order to grow faster in this field.

- Herbert Fromme is an insurance writer based in Germany.