Since enactment of the Third European Union Directive in 1994–which, among other things, allows life insurance providers based in one EU country to sell products and services in any of the other 26 member nations–a number of insurers have successfully crossed borders to expand their businesses beyond their home markets.
Yet, there is still room for growth. Though life insurance markets such as the United Kingdom and France are approaching saturation, the largest European economy, Germany, still offers opportunities for further market penetration and growth, as highlighted in the chart.
Two major factors underpin the attractiveness of the German life insurance market for international investment.
The German life insurance market has grown steadily in recent years and offers a wide range of products that satisfy basic customer needs. The German consumer of insurance products is knowledgeable and discriminating. Life insurance products are now used as investment and savings vehicles as well as for financial protection, providing payments in case of death, disability, longevity and illness.
Future growth in the life and pensions market will be boosted through a combination of inheritance transfers and maturing savings contracts that need to be reinvested over the next 5 years–by some estimates, maturing contracts will total about EUR450 billion. Although many insurers recognize maturing contracts as a good source for increasing their new business, efforts to retain these monies have had limited success. Only 11% of maturing contracts are now being reinvested with the same provider; the vast majority are either placed into alternative investments or with a different provider.
Over the next few decades, a significant percentage of Germans will reach retirement age. Currently, state pensions represent around 72% of the average net income of pensioners, compared to 19% from private savings and 4% from occupational pensions. Consequently, because of the pressures these expenses are exerting on national and state budgets, the federal government introduced pension reforms to reduce the level of state support and encourage tax-favored private pensions. Because this will probably lead to an increased emphasis on personal responsibility for financial, healthcare, and retirement investment management, it is not unreasonable to expect annuities and unit-linked products to grow in popularity in the coming years.
Life insurance products are seen by customers as long-term, secure investments. They also enjoy certain tax benefits, especially products with a term greater than 12 years. For short-term investments (up to 5 years), several other financial vehicles are available that are more attractive to customers because of their flexibility and performance. Already the pension business represents nearly half of all regular premium new business for the German life market.
In terms of accessing the market, by essentially creating a common insurance market for EU countries, the 1994 directive offers opportunities for insurers to leverage tax and regulatory advantages across national borders, either by taking advantage of the directive’s “freedom of services” provisions or by establishing branch operations in target countries.
Both the freedom of services and branch methods require supervision by the insurance authority of the insurer’s home country. Because other countries may enjoy regulatory environments more relaxed than Germany’s, there are distinct advantages to writing cross-border business. For example, Ireland, Luxembourg and, to a lesser extent, Liechtenstein are now popular locations for establishing insurance subsidiaries for cross-border business–even some German companies use Luxembourg subsidiaries to write policies in Germany. [Note: Liechtenstein is not part of the EU but part of the European Economic Area, which allows companies to sell into the EU countries from Liechtenstein as well.]
Taxation is an important attraction; these three countries have the lowest tax rates in the EU. Moreover, companies selling across borders are subject to the consumer protection requirements and policyholder taxation rules of the target country. If companies base their cross-border operations in countries like Ireland, Luxembourg, or Liechtenstein, the authorities usually require that administration be performed in the home country. Some customer servicing and most sales functions are usually based in the local country for obvious linguistic and cultural reasons.
The German life insurance market represents an attractive opportunity for expansion and growth. Demographic changes, high consumer awareness and tax incentives will continue to drive demand in the private pensions business. High volumes of maturing life insurance and other investment contracts create unique opportunities for reinvestment that will need to be met in the coming years. And more restricted state benefits for the disabled will increase demand for disability and critical illness policies.
For American and other non-EU companies seeking to expand their business into Germany, the simplest approach is to establish a subsidiary in any EU country–if they don’t have one already–and to sell into the entire EU, including Germany, through the freedom of services provisions of the Third European Union Directive.
Uwe Klinge and Martin Dember are consultants in Milliman’s Munich office. They can be contacted at or at . For more information, Milliman has a white paper that can be accessed at .