Insurance Companies and the Financial Crisis – Answers Given by Dieter Kipp
In view of spectacular bank failures, the problems of insurance companies do not take centre stage. How much are they affected by the financial crisis from your point of view?
For all insurance companies, returns on financial investments are a significant source of earnings so that the German insurance sector also feels the impact of the current turmoil on the financial markets. On account of write-downs that are also required for fixed-interest securities, I expect in fact that the results will be lower for 2008.
However, strict investment regulations and the enhancement of risk management systems, which was launched in the aftermath of the crisis in 2002, provide for an overall stable situation. In particular, life insurers managing financial investments amounting to around EUR 700 billions are able to hold positions to maturity due to the long term of life insurance contracts and are not forced to sell when the market is low. Moreover, they do not face a refinancing problem as the customers pay their premiums on an ongoing basis.
What are the biggest challenges for insurance companies in the near future?
The situation in the German insurance market was not easy before the financial crisis to begin with. Stagnating contributions in the property insurance segment and deteriorating framework conditions for life insurance are symptoms of an extremely challenging market environment. Because of the cloudy economic outlook and the resulting reluctance of customers from the retail segment to sign life and pension insurance contracts with a long term, I expect that 2009 will be a difficult year bringing a slight reduction in new business. Moreover, rising unemployment could also increase cancellation rates for existing contracts.
In the field of property insurance, I do not see any change in competition nor any sign of a reduction of premium income. However, this only applies to mass retail business. For industrial insurers, I expect that contributions paid will decline for cyclical reasons.
As in the past, insurers will be forced to intensify their sales activities, to optimise the value creation chain and to further develop the control instruments for earnings, costs and risk management. In addition, they have to make sure that control signals are actually followed up by appropriate measures. Thus, the crisis clearly demonstrates that Solvency II is not a bureaucratic exercise imposed by legislators and that insurance companies are well advised to start to implement these regulations early on.
