Challenges in life insurance

Throughout the long history of German insurance companies, they were never confronted with so many challenges as they are now. A survey and an attempt to show ways out of the situation.

Life insurance has been solid as rock in the German insurance industry for decades now. After all, it was once Germany's most popular pension scheme. In the meantime, the future of the product category is more than uncertain.

Low interest rates and demographic change

Low interest rates on the capital markets are one of the biggest challenges in the life insurance segment. And at latest with the onset of the pandemic, the days of viewing it merely as a phase are likely to be over. The weakness of the global economy due to lockdowns and infectious events and the uncertain timing of a recovery make the financial future extremely uncertain.

There were two main arguments in favor of life insurance as part of old-age provision, also from the point of view of the insured individuals. The prospect of a guaranteed minimum interest rate ("guaranteed interest rate") and the promise to get back at least the premiums paid in. The persistently low interest rates on the capital markets, however, are hindering the ability of insurance companies to meet these interest rate promises.

This also applies to the guaranteed repayment sum. After all, if the interest rate for government bonds with a term of 10 years is currently -0.5 percent, customers effectively have to accept a loss in value.

So it looks like two of the key selling points for life insurance are eroding. Unpleasant enough as it is for insurance companies, many companies still have policies in their portfolio where interest rate promises from better economic times are to be fulfilled.

Demographic change is not a completely new development, but it is nevertheless having a major impact on traditional life insurance. The declining proportion of young people in the population naturally limits new business. There are simply fewer and fewer people who have to deal with the issue of old-age provision. Especially since younger and more enlightened consumers are also following what is happening on the capital markets. Life insurance is increasingly seen as unattractive.

Legacy systems and regulation as additional complications

Just for the sake of completeness, two further difficulties for life insurance companies should be mentioned at this point. On the one hand, there is the regulatory framework: starting with the DSGVO, through the requirements for equity ratios and the German Act to Strengthen Company Pensions (Betriebsrentenstärkungsgesetz), right up to commission caps, there is an extensive framework that has to be implemented and monitored. And its implementation and mapping in the insurance company's IT is connected with enormous expenses.

And this brings us to the second major obstacle in the daily business operations of life insurance companies. Established companies with an extensive portfolio of old contracts in particular are faced with the difficulty of transferring data from historically grown legacy systems, some of which have grown historically, into a uniform IT structure.

What are the possible solutions?

Like any other company whose products are subject to similar pressures, this leaves life insurance companies with three strategic courses of action.

• A withdrawal from the segment, i.e. the classic exit strategy. So that includes stopping new business and possibly even passing on the portfolio.
• Focusing on a specific product, target group or distribution channel. This reduces the complexity and thus also the costs.
• Retention of the existing product range and distribution channels. In light of the challenges, this is without doubt the most demanding path and it must be supported by operational measures.

These operational measures include the improvements in IT already described in order to permanently reduce costs. Breaking down silos, merging inventory systems and developing new ways to reach customers on digital channels.

As shown, the traditional models in life insurance can no longer be maintained. So it is also necessary to do something on the product side itself. One way is to create hybrid products that do away with the guaranteed gross premiums. From the client's point of view, this certainly opens up opportunities, as it means that investments can be made at a higher risk, but possibly in a more profitable manner (for example, in instruments such as ETFs).

Such products can also be developed in relation to the customer risk classes. Risk-averse policyholders may then choose a policy that offers a 60 percent premium guarantee, but fewer prospects for returns, while return-oriented customers will accept higher losses.