Foreign insurers ready to run for cover in Germany: EU directives will open a potentially lucrative market, but new entrants face a long haul in wooing clients, writes John Eisenhammer

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The Independent Online
GERMAN insurance salesmen are a persistent lot. No sooner have you contacted Herr Schultz, the agent highly recommended by your new neighbour, than he has set a time to discuss the state of the world and all your insurance needs. The suggestion that the business could be dealt with over the phone provokes wounded incomprehension.

Asking the neighbour whether it would not be wiser to shop around for a few comparative quotes elicits disdain. Herr Schultz has been doing the family's insurance for years and is absolutely trustworthy, comes the reply.

The company Herr Schultz represents seems almost an afterthought. In Germany's highly regulated market, products are so similar that shopping around appears pointless.

But forces are about to be unleashed that could disrupt this tranquil scene. In July, the European Union directives on deregulating the insurance market come into force. Many of Germany's strict controls on prices, products and policy wording will be lifted.

In life and motor liability insurance especially, the potential for real competition will arise overnight. Will the cosy arrangements that have allowed even the least efficient of Germany's 600-odd insurance firms to make a good living be blasted away?

'I doubt it,' smiles Uwe Haasen, the board member responsible for domestic operations at Germany's insurance colossus, Allianz.

'Insurance is a culture-based product. As long as Germans stay German, and the legal and taxation systems are not harmonised, there will be no dramatic upheaval. The deregulation will produce evolution, not revolution.'

Nevertheless, foreign interest in the German market is intense. With nearly DM200bn ( pounds 80.6bn) in annual premiums, it lies just behind the UK. 'It's an absolutely key market,' says Claude Bebear, head of Axa, the French group that claims to have a DM9bn acquisition war chest at the ready. The Italians, Swiss and Dutch are also prowling.

The idea that the German market has been inaccessible is misleading, however. While the near 20 per cent share taken by foreign firms is less than the 30 per cent of the Italian market, or 25 per cent in Britain, it is well above France's 11 per cent or Switzerland's 7 per cent.

However, many of these foreign companies have been in Germany for decades, and none has challenged the way the market works. The question is whether foreign- based companies will now start offering new products, aggressive price competition and innovative marketing.

Bob Yates, European insurance specialist with the brokers Fox-Pitt- Kelton, thinks not. 'The foreign factor will remain minuscule. The power of the tied-agent networks and the strength of the client-agent tradition mean Germans are not used to shopping around. And they are financially very conservative. What happens in the next 10 years will depend on how much German insurers want to hurt each other, not on how much they suffer at the hands of the British, French or Dutch.'

German insurers show little stomach for a domestic battle, and there is no sign of sizzling new products being developed. The explosion in car thefts following the opening up of Eastern Europe, unusually high bad weather claims, and the massive costs of expanding into eastern Germany have produced heavy underwriting losses over the past two years.

'I cannot see companies just waiting for deregulation to slash prices. Most want to get their balance sheets back in order. By 1996/97 we should see more competition,' says Hans Ritterbex, chief executive of Deutsche Herold, Germany's seventh-biggest insurer.

Such apparent confidence should not be mistaken for business-as- usual complacency. 'We have been preparing for this deregulation for five years,' notes Allianz's Mr Haasen.

Number one in Germany, and Europe, with DM63bn of premiums worldwide in 1993, Allianz has restructured its business. It has turned its separate branches for life, house, car and so on into client- based divisions for private, commercial and industry.

'We have just two management levels between the board and the insurance staff,' says Mr Haasen. 'We have also invested heavily in our computer system - 85 per cent of our 7,000 full-time tied agents have a linked lap-top.'

Deutsche Herold, one of Germany's last big private insurance firms, drew other conclusions from the impending deregulation. 'We recognised the sign of the times, and the importance of linking up with a global player who would give us the capital necessary for competing in the European market,' says Mr Ritterbex.

In 1992, the Herold fell into the broad arms of Deutsche Bank, which was looking to boost its insurance activities. 'We could have got more money from a foreign buyer - there were plenty of offers. But Deutsche Bank brought powerful business support and a strong branch network, which are decisive factors,' says Mr Ritterbex.

German insurers accept that agent networks make them expensive compared with some foreign operations, but argue that this is not a cost disadvantage since any foreign aspirant in Germany would have to build or buy a network.

There were once high expectations of direct selling in Germany, but it never got beyond 8 per cent of the market. About 5 per cent is sold through banks, and the rest by agents.

'Allianz keeps over 90 per cent of its customers each year, compared with an average of between 60 and 70 per cent in Britain,' says Mr Haasen.

Elmar Helten, professor of insurance economics at Munich university, does not expect much change in prices after July.

'Foreign firms operating into Germany face the same local risk calculations as domestic companies, and that accounts for 80 per cent or more of costs. From the 10-20 per cent of administration costs remaining, it will be hard to find big savings. Germans are not price-sensitive in insurance, and are unlikely to jump to an unknown firm for a 1 or 2 per cent discount.'

Similarly, British insurers' claims to deliver higher returns from equity-based life policies run up against deep German mistrust. Allianz, for example, has no unit- linked policies.

Less than 10 per cent of funds managed by German insurers is invested in stocks - the vast majority is in low-risk bonds.

'Again, it is a cultural phenomenon,' says Mr Haasen. 'Britons see life policies in financial terms, as an investment where returns are crucial. Germans see them as a savings vehicle for old age, where security, not risk, is what counts.'

Even so, thanks to Germany's low inflation record, German clients have enjoyed higher real returns on life policies than their British counterparts.

One company that believes it can bridge the Anglo-German cultural gap is Equitable Life, which since 1993 has been building up its own network of fully paid representatives to market its products in Germany.

Its advertising slogan, 'The finer society', underlines its targeting of that small section of people already accustomed to international equity investments, who may be attracted by the greater flexibility of British life products. 'Deregulation will make quality advice on products even more important than previously,' says Ulrich Braesz, Equitable's head in Germany.

'In four to five years we will have about 60 agents, and soon after that we hope to be profitable. We have chosen the slow, expensive way of developing our team and image, because it is the right way here. In Germany, you play for the long term.'

(Photographs omitted)