Assisted by the broadly positive prospects for the economy as a whole as well as for capital markets, and given the robust state of the insurance industry, the underlying mood driving expectations for the development of business in 2011/2012 is currently one of optimism. This should not, however, obscure the uncertainties that still exist or the risk of setbacks asso-ciated with the global imbalances and the failure as yet to restore fi nancial stability to the Eurozone on account of the budget situation of certain member states. These factors pose a latent threat to international fi nancial markets. Any turmoil occurring there could spill over again relatively quickly to the real economy and ultimately also to the insurance sector.
Germany
Looking at the German insurance industry, we see a broadly stable business development in the crisis years that has been further energized by the dynamic cyclical recovery of the German economy. Overall, then, we anticipate a modest increase in premium income in 2011 and 2012, the amount of which will ultimately depend on several factors. In addi-tion, we are looking to a steady increase in concentration on the German insurance market, which will be fostered by the approaching implementation of Solvency II and the associ-ated demands placed on capitalization and the installation of complex control and monitoring tools. Smaller insurance companies, in particular, could come up against their limits here. What is more, the trend towards industrialization of insurance production – especially in retail business – and the
progressive internationalization of the insurance industry are likely to advance the anticipated consolidation process.
There are indications of further diff erentiation in the sales landscape, with an emphasis on the intensity of consult-ing required by the various products. On the one hand, the Internet is playing an ever greater role here inasmuch as it is increasingly used not only as a source of product and price information but also as a means of closing contracts and accessing extensive service functions. Further potential for expansion can also be discerned in bancassurance.
The current hallmark of German life insurance is vigorous, albeit of late slightly slowing growth in single-premium busi-ness and soft busi-ness in new busibusi-ness with a regular premium payment. The interest rate environment will be crucial to fur-ther developments within the forecasting horizon to the end of 2012. The dilemma facing German life insurers – one that will only become more acute going forward – is that the high minimum guaranteed interest rates entered into (especially in the existing portfolios from prior years) cannot be earned in the prevailing low interest rate climate; looking to the future, then, it will become increasingly diffi cult to operate successfully with low interest rate levels. In our assessment, given its solid capitalization and reserves as well as its long-term investment horizon, the German life insurance sector should be able to survive a few more years with interest on investments of around 3%, but aft er that things could quickly become very challenging.
The decisive parameters for the development of the life insurance sector over the coming two years will continue to be new business and the lapse rate. Having been severely impacted by spillover eff ects of the fi nancial crisis, we also see fresh demand impetus for unit-linked life insurance prod-ucts as trust in the fi nancial industry rebounds. In general terms, however, it is our belief that the industry’s core task lies in enhancing the fl exibility of the business models in life insurance through innovative products. In our assessment, the future belongs to life insurance products that can be fl ex-ibly attuned to the individual needs of customers in various phases of life. We are convinced that on this basis life insur-ance off erings can once again become the key product for individual retirement provision. A growing lapse risk can be
assumed in a scenario characterized by a sustained economic downturn and a sudden sharp rise in interest rates. This could prompt a sizeable portion of life insurance custom-ers to cancel their existing long-term retirement provision policies early. In order to pay the surrender values associated with these unexpectedly high lapse rates insurers would have to liquidate investments, leading to a decline in invest-ment income, a lower return and an even greater lapse risk.
While we do not rule out the possibility of such a scenario, we consider it highly improbable. In our basic scenario we are looking at stable economic growth without any sudden shock increase in interest rates. Over the next two years the Ger-man life insurance market will also be shaped, in our view, by increasing competition for sales capacities as well as by the regulatory requirements for solvency and risk capital antici-pated under Solvency II. Against the backdrop of changing capital requirements, we may see a far-reaching reorientation in the market and competitive situation.
For German property and casualty insurance we expect fun-damentally positive infl uences from the friendly economic climate that is likely to be sustained in Germany over the next two years. Nevertheless, the already attained level of market saturation puts relatively tight limits on further growth in the quantity structure. We believe that tariff s and premiums have room to move higher in a variety of lines.
The scope for premium increases could be extended still further by positive economic eff ects, since rising produc-tion numbers normally go hand-in-hand with rising claims expenditure, which in turn lead to higher minimum required premiums. All in all, it is our expectation that the pressure on underwriting profi ts will also continue to grow as the net return on investments keeps falling.
In motor insurance, which in the German insurance industry traditionally serves as a gateway for generating new business, we anticipate sustained fi erce competition over the coming two years – which could, however, shift from a pure price war to other competitive factors. This view is supported by
the fact that the asset base of numerous providers has been heavily eroded by the years of price warfare. The current level of average premiums in motor insurance is not adequate and must rise over the short or long term. One reason for the recurrent annual fl are-up in price competition is the prevail-ing market-wide renewal date of 1 January. It is our expecta-tion that greater fl exibility in the renewal date will also result in motor insurance premiums that are more commensurate with requirements.
International markets
Although there is no mistaking the risks to the global econ-omy, our assessment of the economic growth prospects for 2011 and 2012 in the most likely basic scenario is broadly favorable. In this context, the pace of growth is expected to be particularly dynamic in the emerging markets, which over the longer term will show growth rates roughly double those of the industrialized nations. Established insurance groups with a keen interest in opening up new growth poten-tials – and which are also equipped with the fi nancial means for further expansion – have increasingly come to focus on emerging markets in recent years as desirable target markets;
the market share of these countries is thus steadily increas-ing on the back of disproportionately strong growth relative to the industrialized nations. The vigorous rise in demand for insurance protection is driven by brisk, dynamic economic growth and growing affl uence in these countries. Along with the up-and-coming economic giants of Asia – such as China, India, South Africa and Malaysia – Latin America also ranks among the preferred growth markets of internationally oper-ating insurance groups. It is our assumption that the appeal of Latin America – including Mexico – will continue to grow, especially in the area of retail business, because the compara-tively well-off middle class in this region is rapidly expanding and its insurance needs are hence also on the rise. Consider-able demand stimuli can also be expected from the major sporting events recently awarded to Brazil – namely the 2014 Football World Cup and the 2016 Olympic Games.
On this basis the growth prospects in international property/
casualty insurance can be assessed as favorable, especially in emerging markets. The profi tability of property/casualty insurers will, however, initially continue to decline in 2011
and 2012. Even if wide-ranging premium increases were to be implemented in the course of 2011 – fi rst and foremost in motor insurance –, these will not be refl ected in the results posted by insurers until aft er a time lag. This means that technical results cannot be expected to show gradual improvement across a broad front before 2012 at the earliest, although the margins generated prior to the fi nancial crisis will not be attainable for the foreseeable future.
On the international life insurance markets, too, a healthy growth outlook can be anticipated because demand for funded retirement provision products in the context of indi-vidual old-age provision as well as provision for surviving dependants remains strong. It is, however, also the case in life insurance that a strong diff erence in the pace of growth is likely to be evident between the industrialized nations and emerging markets – with the latter spurred on by favorable demographic and economic framework conditions. A special challenge facing life insurers is the need to generate suffi -cient investment income to off er their customers an attrac-tive return without overextending their own risk position. On the other hand, it must be anticipated that European insur-ers, in particular, will have to cope with a rising cost of capi-tal under Solvency II since capicapi-tal requirements in certain subsegments – such as for riskier asset classes or for products with high guarantees – will become more exacting.
Conditions in non-life reinsurance are broadly satisfactory, even though rates declined sometimes substantially on account of the healthy capital resources enjoyed by primary insurers and the absence of market-changing major losses in the developed markets. As a direct consequence of the heavy loss expenditure associated with the sinking of the “Deep-water Horizon” drilling rig we are seeing appreciable price increases on covers for off shore oil exploration. We anticipate further price increases in the April and July treaty renewals, especially for Australia in the aft ermath of the severe fl ood-ing of December 2010 and January 2011.
In the coming years, as in the past, we expect to see a positive basic direction and further dynamic growth in international life and health reinsurance business. On a global level the growth recorded in life and health reinsurance should con-tinue to outpace the comparable growth on primary markets.
In this context we are seeing a shift in demand for new busi-ness away from developed markets such as the United States, United Kingdom and Germany towards emerging markets such as China, India, Brazil and Latin America. The prepara-tions for Solvency II, and in particular the stress tests per-formed by the EU, have led to a greater risk awareness among European insurers and highlighted the important role of reinsurance as a means of risk and capital optimization. This is especially true of small and mid-sized insurers, specialty providers and mutual insurance companies.