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MP66088

MAPS EUROPEAN LONG TERM INSURANCE 1998

Overview

Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

The market for long term insurance in Europe is diverse and the markets in which insurers operate differ widely in terms of products and distribution. The degree to which the markets have been developed and penetrated also differ considerably, with some such as the UK market, mature and with a wide product range. Other markets have further to go before they reach the same levels of maturity. France has experienced good growth in recent times and has benefited from the rise of the bancassurers, Germany has recently opened up the potential size of the market post- unification and there is much room for further development.

In the Long Term Insurance market the single market has been the focus of three Life Directives, the First of which in 1979 permitted insurers in member states establish branches in any other member state. The company was only required to establish solvency in one state in order to be approved in another.

The second Life Directive enabled an insurer established in one member state to accept a risk in another member state without actually establishing a branch there. This enabled companies to receive investment business from investors in other countries within the EU.

The third Life Directive virtually eliminates the differences between host and home authorisations and greatly simplifies the authorisation process. It is early yet to see how much difference this will make to the market which at present operates very differently in different member states..

Long term insurance in Europe is showing an upward trend as companies continually seek new markets, new products and new methods of distribution. The UK market has suffered from problems relating to public image and the costs of regulation. It can provide a useful model to other countries who may experience similar problems in the future.

The use of new distribution channels has enabled insurers to reach new markets. For example, the bancassurers have reached new customers in France and Spain where previously there was less business being sold. Telephone sales may prove less attractive than for other personal lines products but they are making an impact and have the potential to reach new markets as well as providing a more streamlined delivery to existing clients.

FRANCE

France is the largest of the European long term insurance markets with over $80 billion gross written premium The market has shown healthy growth during the 1990s but may be reaching a position of maturity.

Attractions of the Market

· Its size - the French population is one of the larger of the community and has a strong growth rate.

· The market is not very consolidated (the top 5 companies hold under 50 percent of the market) which makes entry easier for new companies.

· Savings are becoming increasingly popular which has boosted individual life assurance sales.

· There has been strong sustained growth.

· Concerns about state pensions support this market and this is likely to continue unless there are changes in the political climate.

Disadvantages of the Market

Distribution is dominated by the banks. More than 50 percent of business is sold through this outlet. The growth which has resulted in this domination has come largely at the expense of the traditional tied agent channel. This has lead to a streamlining of costs and an increase in competition as products need to be sold in bulk to make this cost effective.

Future Prospects

· The maturity of the market makes it likely that the future will see consolidation rather than rapid growth. However, Market Assessment predicts a compound annual growth rate of 9.5 percent for the period 1997-2002.

· French insurers, notably AGF and AXAUAP, have expanded their operations in other European states and seem well positioned to maximise on the potential offered by the single market.

· Gross written premiums - This refers to the premium before reinsurance premiums and any other costs have been deducted and added from other sources.

GERMANY

Germany has the largest population of the European countries. This market has, until recently been very conservative and rather over-regulated. The de-regulation of the market resulting from the Life Directives should open up this market and could lead to considerable growth in the future.

Attractions of the Market

· The market is the largest of those covered in this report with a population of 81.8 million.

· The appeal of the market is enhanced by the relatively under-developed market in the East of the country.

· Economic uncertainty promotes the selling of financial products especially protection insurance products.

· The market is not very consolidated and appears to be becoming less so. This makes it attractive to entrants who do not have to battle with giants who have a grip on the market.

· The amount spent on insurance, per inhabitant is increasing showing a compound annual growth rate of 11.3 percent between 1991 and 1995.

· Planned reductions in state pension provision gives a market opportunity.

Disadvantages of the Market

· The market is well regulated, perhaps over regulated, restricting the speed of development.

· The banks are a powerful agent in this market and the growth of bancassurance may make it difficult for other operators.

Future Prospects

The German market is less mature than those of France and the UK making it a strong contender for future development in terms both of size and product diversity.

· The German market is predicted by Market Assessment to grow at a compound annual growth rate of 12 percent up to the year 2002.

· The market will increasingly become deregulated which will enable the development of new products and markets in response to social and economic conditions.

· There will be an increase in the importance of banks as a distribution outlet, this may well result in a reduction in the number of medium and small companies who are unable to compete with the large financial retailers.

ITALY

The Italian market has the critical market size for development along with proven development ability. Attempts are being made to reduce the benefits provided by state pensions, which may well lead to developments in this market.

Attractions of the Market

· The market is the fourth largest in Europe and is rather under developed giving plenty of scope for growth.

· Changes are being made in state pension provision, which will increase the scope for the development of the private pension provision.

Disadvantages of the Market

· Traditionally this is a non-life insurance market, which needs educating into life insurance.

· The market is very concentrated with 44 percent of the market concentrated in the top five companies.

· Poor equity performance has resulted in caution in using insurance with an investment linked element as a savings vehicle.

Future Prospects

The Italian insurance market will develop as a result of the directives. The attractions of the market to new entrants will bring new products to the market and perhaps develop the market in complexity.

· Italy is an exciting prospect for the new decade and Market Assessment predicts a compound annual growth of 17 percent, between 1997 and 2002.

· Bancassurance looks set to increase and it is predicted that this channel will account for approximately one third of sales early in the new decade.

· As state social security provision reduces, private provision will become increasingly important.

· Italy is the European country most likely to have the types of problems experienced with misspelling as in the UK. Regulation will be important if the market is to develop smoothly.

UNITED KINGDOM

The United Kingdom (UK) is probably the most mature of these markets and has a level of product sophistication not found elsewhere. The mature nature of the market makes it unlikely that there will be spectacular future growth. The market has been beset with problems as a result of expensive regulatory developments and a rash of bad publicity. There needs to be a period of improved public image and cost cutting for future development to be significant.

Attractions of the Market

· The market is large and mature and has suffered problems of late. However, these problems should now be behind the industry and new challenges can be met.

· There is public concern about lack of funding for health and social security and this should result increasingly in people looking to private provision for long term care and pensions.

· The innovation shown in the market will no doubt be applied to distribution and future product innovation.

· Insurance is still under sold in the UK and there are many people who still have large long term insurance needs.

Disadvantages of the Market

· Being sophisticated, the market has less scope for growth compared with some others, for example Italy.

· The cost of writing business has increased as a result of regulation.

Future Prospects

This mature and sophisticated market is unlikely to show spectacular growth. However innovations in distribution are resulting in retailers meeting new markets. Increased competition is leading to polarisation in high net worth distributors offering complex products with value added services at one end, and low cost simple product selling in volume at the other end of the market.

· Market Assessment predicts growth of the UK market will be at a compound annual growth rate of 2 percent between 1997 and 2002.

· Distribution will become more polarised. Direct sales over the telephone, off the page and the internet will be of increasing importance.

NETHERLANDS

This is the 5th largest market in Europe and has a degree of sophistication, which places it with France and the UK both in terms of products and distribution. Direct writers have had some success in this market but it is dominated by brokers rather than the banks which are having such an impact elsewhere. The relative sophistication of investors has resulted in telephone selling being very popular.

The market is fiercely competitive and highly concentrated with 63 percent of the market being concentrated among the top five companies. This would make the market difficult for new entrants to break into.

Growth has been at 9.4 percent over the period 1992-96 and, it is predicted this will be sustained in future.

SPAIN

It seems that, as with so many other countries the banks are set to dominate the Spanish life assurance market in the future. They have made a considerable impact and have contributed to rising new business figures in Spain. Short term life insurance products have been boosted by recent tax changes.

The market is not particularly concentrated compared with some of its European colleagues. Only 29.2 percent of business is concentrated among the top five companies.

Life insurance premium income increased at a compound annual growth rate of 10.2 percent between 1992 and 1996. Much of this was achieved in the early part of the decade and the growth has tailed off of late.

BELGIUM

The Belgian market is of interest because of the fact that it remains relatively underdeveloped. Traditionally there has been a high level of state provision and there has been little to encourage a high level of personal provision.

The more favourable tax treatment of life assurance in Luxembourg mean that this is a popular destination for Belgian savings. Belgians are heavily taxed and this has had influence on their attitude to savings. The small market and proximity to Luxembourg has meant that the market has not particularly been a target of foreign interest.

Generally the top companies have achieved growth in the early part of the 1990s with the most successful companies in the market being those with links to banks. The market is highly consolidated with 64.4 percent of business coming form the top five companies.

The compound annual growth rate of life assurance premium income between 1992 and 1996 was 16.2 percent, which represents a healthy market.

Text © 1998 MAPS

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Last updated by Paul Tucker 23rd June 1998