Lorena: Mathias and Vincent, first of all, thank you for sharing your expertise with The Digital Insurer. Versicherungsforen Leipzig is one of Germany´s leading institutions for research and market analysis in Insurance Digital Innovation. How would you describe its founding mission and key areas of research? The last 5-7 years have shown an exponential level of innovation in our Industry!
Vincent: Versicherungsforen Leipzig has been founded as an independent research and development institute for the DACH-Insurance Industry. We build an active network of carriers, intermediaries, suppliers, and service providers. We aim to cover the extended value chain with our activities and events. Based on our research, we can certainly confirm the rise of numerous innovative approaches. Existing and new players are experimenting with technologies, products and even business models. There are high expectations for the kind of fundamental changes like the ones of we have experienced in other industries. On the other hand, attitudes towards change can be rather hesitating in our industry. After all, insurance is a long-term business.
Lorena: Together with product and customer experience innovation, Germany is a hot spot for Foreign Direct Investment, e.g. strategic investments like Ping An with the German Finleap, or target of market expansion by utilising MNEs strategic advantage resources, e.g. customer base. Indeed, we are seeing a number of “hot” candidates for an immediate market entry in European Insurance, as new actors. Which advantages are pursued the most by foreign investors?
Mathias: At the moment, a lot of investments seem to aim for a toehold. Investors set foundations and gather experience for possible further ventures. We assume that potential entrants are well aware of the peculiarities of the market and especially the complexity of regulation. They will have analyzed preceding attempts like Google Compare and they will be well aware of the considerably low margins that current insurance products are offering. From their domestic perspective, they are probably aspiring to growth and diversification.
Lorena: In parallel, market-specific factors, e.g. economics, political, enhance Germany´s attractiveness for entrants. What is the result of Versicherungsforen Leipzig´s research to this regard?
Vincent: For companies that want to enter the European Market, Germany might be a good starting point. It is a considerably big and financially strong market, it has been very stable both from the economic as well as a political point of view. Germany is perceived to be a safe harbor while economic and politic uncertainties are rising internationally (low-interest rates, looming trade wars, growing state indebtedness). Some analysts claim that the German insurance industry is ripe for disruption, based on the fact that processes and products have been rather static for decades. German insurance companies seem to be particularly slow at the digital transformation – so there might be some opportunities to leapfrog them with fresh ideas. On the downside, the market is no longer growing, but that might be balanced by the fact that market penetration is static on a low level in most classes of private insurance.
Lorena: Can we foresee that Germany´s Insurance landscape will present an increased consolidation as a market?
Vincent: When we talk about risk carriers, I think consolidation will go on, regardless of some possible new entrants. Historically, there is a huge number of small and medium companies. Industrialization and digitalization change the minimum efficient scale so we expect to see mergers and acquisitions, possibly also run-offs in the future. Successful entries to the market might even speed up this process. When we also look at brokers, agents and service providers, the picture becomes more diverse. We are seeing a decline in old fashioned resident intermediaries that will go on simply because entrepreneurs are retiring. Digital services and startups are on the rise for now, but we expect to see some winner-takes-it-all effects and consolidation in this sector as well.
Mathias: We have to admit that our international research has been biased towards big players. We do not expect a land rush of international start-ups on the German markets, as regulation would give them a hard time. We are looking at domestic start-ups and insurtechs independently, but we do not expect those to compensate for existing consolidation in the long run.
Lorena: Would you say that the increased (internal) market consolidation could be considered as defense mechanism from foreign partner´s acquisitions and to preserve local market profitability (possibly as mitigation to low returns specifically in the life business)?
Vincent: About 200 German Insurance Companies have been merged, acquired or closed down since 1990, but there are still 529 left [GDV 2018]. I do not think that consolidation at this level and pace provides protection against foreign acquisitions in general. Strategic domestic acquisitions to prevent foreign interference might be considered in individual cases. There certainly is an interdependency between market profitability and consolidation.
Lorena: Based on your research, which entrants and industry sectors are mostly attempting a new market entry?
Mathias: Our best guesses are online retailers and financial companies.
Online retailers can broaden their existing offers and add value to the customer. About financial companies, we are monitoring closely what Chinese carriers like Zhong An and Ping An are doing, as they are experimenting with digital products and offerings in their domestic markets. Those are unlike the classical offerings existing in western markets. It is hard to predict what popular products from foreign markets can actually be transferred elsewhere – but if they can be, incumbents might find themselves unable to catch up fast enough. Online retail companies like Amazon or Ali Baba (whose broad entry into the European retail market has been rumoured for some time) can build on excellent customer access. Customer satisfaction is very high, especially when it comes towards handling returns. Prospective customers will probably place trust in similar quick and satisfying handling of insurance claims. It will be a big advantage that the average customer will experience positive services on a regular base opposing to existing insurance companies that might not have a relevant service contact for years. Also, if an online retailer handles the majority of a given customers purchases, the retailer might offer risk coverage in a novel way: if customers get prolonged and comprehensive risk coverage on everything they buy, will they still need household insurance?
It is well known that Amazon has both financial means and relevant data required for entry into the insurance sector. Asian companies have financial means as well. They might get relevant data via cooperation with tech companies: Tencent and Alibaba Group happen to be invested in Zhong An.
Lorena: Finally, the dynamics of new entrants or partnerships as IJV are surrounded by unforeseeable factors. Against the pressure to acquire local market knowledge, foreign partners will certainly offer strategic resources at a scale, from innovation to financial capabilities. Based on your research, which strategic and operational risks surround foreign ventures in the D-A-CH market?
Vincent: As far as we know, incumbents are more than willing to cooperate with entrants. We are seeing major investments of DACH insurance companies into insurtechs and start-ups in general, both internationally and domestically. We are experiencing huge interest in novel ideas and new players at our events. From the entrants’ point of view, joined ventures might make a lot of sense to cope with regulatory issues. Having said that, we have little indicators of what kind of market entry international players will actually choose. If they are pushing for an aggressive entry, incumbents might be expecting interesting times.
GDV (2018): Statistical Yearbook of German Insurance 2018, [online] Available at https://www.en.gdv.de/resource/blob/36494/8bb7e53b2e4fd0d88b412b1d9d0add65/statistical-yearbook-2018—download-datei-data.pdf (accessed: 13 March 2019)