Dr Bernd Michaels explains only sluggish growth is expected in property/casualty insurance in Germany.

For decades, the German insurance industry has virtually been synonymous with a growth industry - an assessment underlined by annual average growth rates in nominal premium income of over 10% in the 1970s and of almost 7% in the 1980s. In the 1990s, the rate of growth eased again after the special effects associated with German reunification petered out, and in 1999, it is expected to stand at last year's level of around 2%. Only the life and health insurance sectors will grow, however. The property/casualty sector is expected to be sluggish. This means that the insurance industry's lead over the economy as a whole in terms of growth has been largely lost.

Continuing high unemployment and only moderate increases in incomes have restricted the insurance industry's scope for growth. The actual material ability of people to make provision is increasingly falling behind their level of willingness to do so, which remains high. It was once again confirmed in 1998 that an only temporary increase in business activity, like the real economic growth of 2.8% seen, is not enough to have a sustained positive effect on the rather long-term decisions taken by private individuals with regard to protection against risk. Moreover, the upturn seen in the last year has been export-led, whereas demand for insurance corresponds above all to the internal economic trend.

But the fact that economic activity was too weak was not the only reason for the significantly slower rate of growth - various changes on the insurance markets themselves were also reflected here. The industry is in a phase of reorientation which is far from over, and these factors within the industry have the effect of curbing growth.

property/casualty insurance have been particularly affected by this, with premium income falling in each of the last three years (by 0.1% in 1996, 1.0% in 1997 and 1.7% in 1998). In 1999 too, it does not yet look as if there will be any reversal in this trend. In 1998, the premium volume in property/casualty insurance still came to DM93.4 billion (1997: DM95.0 billion), with motor insurance alone accounting for some DM39.0 billion or just under 40% of the premium income in property/casualty insurance. The next biggest branch of property insurance - though a good way behind - is general third party liability insurance, with a premium volume of DM11.3 billion.

Besides the traditional approach based on branches of insurance, in property/casualty insurance the differentiation of business according to groups of customers is becoming increasingly important. Personal lines business on the one hand and commercial and industrial business on the other show considerable differences as regards market structures, market behaviour and market results.

Extensive deregulation and liberalisation which have led to further considerable changes in market structures and competitive behaviour are to be seen as milestones on the way to a single European market. Whereas personal lines business had practically nothing to show in the way of service, intra-German competition - including from foreign insurers located in Germany - intensified to an unprecedented degree. Premium levels and margins came under further pressure, leading to additional efforts to make full use of any potentials for cost-cutting which were still available.

In this connection, one view frequently expressed was that deregulation and the single market would also lead to greater concentration on the insurance market. However, the sheer number of suppliers so far indicates that the level of concentration is not excessive. Over 280 property/casualty insurers have their registered office in Germany. On top of these, there are around 80 branches of foreign insurers operating on the German market. Moreover, in property/casualty insurance, around 500 companies were registered for free service business in Germany.

If one looks at market shares, it can be seen that the 10 biggest groups in property/casualty insurance in 1997 had a combined market share of just over 55%. Even if further mergers and groupings should cause the concentration to increase, the market shares of the major suppliers will remain low when compared with other countries and other branches of the economy. There will also continue to be room on the German property insurance market for suppliers who differ quite considerably as regards size, customer groups, business segments and channels of distribution.

As claims experience in the first few years following deregulation was also relatively moderate, the result was reductions in premiums, even though the calculations involved could not always be followed. Of course, the positive claims trends will not continue in this way indefinitely. In addition, increased efforts are being made to influence risk by adopting targeted loss-avoidance and loss-prevention measures aimed at countering growth in the volume of claims. Insurance cover and ever more comprehensive forms of risk management are increasingly complementing each other here.

But even with such comprehensive risk management, there will still be times when the claims trend is less favourable. As a result, price competition, which in principle is a quite normal market factor, is reaching its limits. However, with the exception of motor insurance, there is as yet no sign of any premium adjustments on a broad front.

Losses in property/casualty insurance have so far often been offset with income from capital investments. If the gap between premium income and claims expenditure widens further, however, while interest income is at the same time reduced as a result of the tax reform and the capital market remains at its current level, this counter-balance will become more and more difficult.

Unsatisfactory trends
In motor insurance, the biggest class of property insurance by far, price competition has been particularly fierce in recent years, being manifested above all in a large number of new discounts. The resultant fall in premium income in motor insurance - by 3.7% in 1996, 4.4% in 1997 and 4.0% in 1998 - was even more marked than that seen in property/casualty insurance overall. As decreasing premium income contrasted with further increases in claims expenditure, significant losses in underwriting business were inevitable, and many suppliers, therefore, announced that their premiums would be going up in 1999.

However, motor insurance is by no means the only class of property insurance to have an unsatisfactory business trend. Industrial fire insurance, for instance, has suffered a major setback. In 1998, premium income in this class of business fell by 22% while at the same time claims expenditure rocketed by 27%. Major losses played a decisive role here. Though fewer in number, the ones that did occur were that much more expensive. Given the extreme competitive pressure, a further fall in premium is expected in 1999 too.

The engineering classes of business also suffered losses (premium income down by 6.0%), as did agricultural property insurances (down by 3.5%). Other classes of business, on the other hand, saw their premium income increase, including personal accident insurance (up by 3%), legal expenses insurance (up by 5.5%) and private property insurances (up by 1.5%).

Tax reforms
property/casualty insurers are also faced with additional burdens running into the billions as a result of the recently passed tax reform, which forces them to slim down their loss reserves. By adopting this tax measure, the government is treading a dangerous path which even the Federal Supervisory Office for the Insurance Industry has warned against, particularly since an international comparison has shown that loss reserves in the past have by no means been over-endowed.

Besides the extra tax burdens and continuing fierce price competition, there is expected to be a noticeable slowdown in the general economic situation in the current year. The economic research institutes have corrected their economic forecasts downward in several steps. Real economic growth is now expected to be no more than 1.5% in 1999. Whether this decline will prove to be temporary, with the rate of growth picking up again appreciably in the year 2000, as forecast by the institutes, remains to be seen, given the many political and commercial risks affecting economic activity.

Generally speaking, looking beyond the year 2000, the market for property/casualty insurance cannot be said to have reached saturation point, particularly bearing in mind that new risks are constantly coming along and require insurance to safeguard them. In addition, there is also an increasing desire to be able to better control industrial, ecological and social risks by means of efficient insurance cover.

Despite the continuing growing need for cover in respect of risks, a return to the high growth rates of earlier years certainly cannot be expected for the German property insurance market. Rather, calculations in this area made by a working party of the association of German insurers, the Gesamtverbands der Deutschen Versicherungswirtschaft (GDV) indicate that premium in property/casualty insurance may be expected to grow by an annual average of a nominal 2.5% up to the year 2010. For comparison: the nominal rate of economic growth in Germany for the same period is after all estimated at an annual average of 4.5%.The euro
The German insurance industry expects the euro to have positive effects in the years ahead. In a larger currency area, investment decisions can be made largely without the shackles of the principle of matching. The deep, wide euro capital market opens up new possibilities for investment and diversification without currency risks. At the same time, however, the euro also means more competition, as it provides immediate price transparency. From time to time it will, of course, be necessary to explain to policyholders that price differences may also be attributable to differences in cover (or that the same prices may conceal quite different covers). A broad field, therefore, opens up here for the growing range of services offered by rating and ranking agencies.

Finally, it should be remembered that, on the threshold to the next millennium, besides the millennium bug the German insurance market is also busy with a whole series of other questions. The statutory regulation of insurance brokers' professional qualifications, questions of international financial supervision and the use of genetic engineering are just a few examples illustrating the complexity of the various areas of tension - politics, economics, society, technology and science - in which the German insurance industry has to prove itself.

Dr Bernd Michaels is president of the German insurance association, the Gesamtverbands der Deutschen Versicherungswirtschaft (GDV) and chairman of the board of Provinzial Insurance in Düsseldorf.