What next for life insurance?

Executive summary

The life insurance industry is operating in an exceptionally dynamic environment. With new products, they can take on the challenges and assert themselves in the market.

Introduction

Difficult general conditions for life insurers. What with the energy crisis, rising inflation, supply bottlenecks and shortages of staff and materials, Germany is facing a number of problems and its economy is heading towards a recession. According to the German government, the energy crisis is growing into an economic and social crisis. Under these difficult conditions, life insurers have to overcome changing interest rates, new regulatory requirements, high cost pressure and more intense digital competition.

Sharply rising energy prices and record-high inflation have had a profound impact on consumer confidence. The massive increase in the prices of gas, electricity and food have weakened their purchasing power and throttled private consumption. Life insurers have also been affected: in times of crisis, the can tended to be kicked down the road when it came to decisions concerning long-term provisions and hedging, says Jörg Asmussen, CEO of the German Insurance Association (GDV). The mood in the industry is unsurprisingly bleak, with almost one in four companies expecting business to decline in the coming months. These are the findings of the economic test of the insurance industry in summer 2022 conducted by the ifo Institute, the results of which were published in September 2022.

Changing interest rates, regulations and old-age pensions

In response to the high rates of inflation, the ECB decided to move away from the ultra-loose monetary policy it had been pursuing for many years. Although life insurers and providers of old-age pension products had long hoped for interest rates to change, there are pros and cons to the increase: on the one hand, rising interest rates mean that companies are less burdened by additional interest reserves. On the other, the majority of the industry’s capital investments have been in fixed-interest securities with long terms, which will result in hidden liabilities on their books.

Additionally, life insurers have to fall in line with new regulatory requirements, as the EU is pressing forward with a complex regulatory framework in terms of sustainability. The implementation of the EU Sustainable Finance Action Plan has made extensive adjustments necessary. This ties up considerable resources, yet also presents tremendous opportunities, as customers are increasingly interested in sustainable insurance solutions.

Social partner model and statutory equity pensions

Great change is also afoot in the world of private and workplace pensions. In October 2022, a collective agreement was signed to implement pure defined contribution plans as part of the social partner model for the first time. To give company pensions even more of a boost, discussions are even taking place on allowing pure defined contribution plans outside of collective agreements.

Proposals for the reform of private pension provision

In autumn 2022, the German government rolled out its proposed statutory equity pension plan known as ‘Aktienrente’. Its purpose: to build on statutory pensions with a capital-funded pension system. To this end, an initial funding of ten billion euros has been planned in 2023. The statutory equity pensions, which now operates under the term ‘Generationenkapital’ (generational capital), is to be significantly enlarged, as reported in August 2023 by business newspaper Handelsblatt, citing government sources. Accordingly, from 2024, a sum of 12 billion euros will be paid into the generational capital fund. This amount will be increased annually by three per cent. By 2035, the volume should equal 200 billion euros.

The German government understands the importance of private pensions and therefore formed an advisory focus group to address the future of private pensions at the end of 2022. In July 2023, the focus group – comprising representatives of the Federal Ministry of Finance, the Federal Ministry of Labour and Social Affairs and the Federal Ministry for Economic Affairs and Climate Action, as well as consumer protection organisations and providers – put forth their recommendations for a reform of the private pension provision. Among other things, the focus-group experts propose to allow higher-risk products without guarantees, more flexible payout models and the preservation of subsidies of the Riester pension scheme. The group vetoed the idea of a sovereign wealth fund. According to the Federal Ministry of Finance, a concrete reform proposal based on the recommendations of the focus group will now be worked on. The legislative process is expected to take place in the course of 2024.

Responding to developments with new products

Life insurers are in a difficult position and are under increasing cost pressure. In this challenging environment, insurers are turning the magnifying glass on their business models and sales structures and positioning themselves in the market with new, innovative products in particular.

More and more insurers are offering unit-linked products without guarantees or unit-linked products featuring investment cover at short notice. The iCCPI (Individual Constant Proportion Portfolio Insurance) strategy makes it possible to offer guarantees whilst maintaining high exposure to upside potential by participating in the development of the financial markets.

Even the significance of hybrid products is growing. Static or dynamic hybrid products combine the advantages of a unit-linked insurance product with those of conventional products. Insurers should also develop old-age pension products that are tailored to the individual needs of their customers and offer more flexibility in the pension payout phase.

Beating the competition with the help of modern IT systems

Regardless of what strategy insurers choose to pursue, they rely on modern, flexible IT systems that have a high degree of automation and standardisation and guarantee a rapid product development process. The policy administration system msg.Life Factory from msg insur:it is a standard solution that allows for digital end-to-end processing of all business processes.

msg.Life Factory features a flexible product model with prefabricated sample products, which makes it possible to develop new, innovative products rapidly for an outstanding time to market. The solution even uses financial models such as the aforementioned iCCPI trading strategy.

The cloud-based standard software is also available as an SaaS model. This opens the door to entirely new business models for insurers, as it is easier for them to position their products and services in a third-party ecosystem or platforms. Using upgradeable standard software also makes it possible to generate economies of scale and save costs. It is simply not possible to operate successfully or flexibly in a dynamic and unpredictable environment without a cutting-edge IT system.