ECONOMIC REPORT
Industry situation and competitive environment
Traditionally, the vast majority of MLP’s total revenue is generated from the following three core fields of consultancy: old-age provision, health insurance and wealth management. In the financial year 2015, these fields together represented 83% of total revenue. Sales revenues in the fields of old-age provision and health insurance are generated in the financial services segment. Sales revenues in the field of wealth management come from both the FERI segment and the financial services segment. The following describes the main factors that had a particular influence on the market environment and the results of operations in the three aforementioned consulting fields in 2015.
As a result of acquisitions, the relative weighting of non-life insurance increased in the financial year 2015, reaching 11% at the end of the financial year. From the financial year 2016 onwards, the field of non-life insurance will become significantly more important again for the financial services segment and the new DOMCURA segment as a result of the acquisition of the DOMCURA Group. We will therefore deal with this field of consulting in more detail with regard to the anticipated business development.
Old-age provision
In the reporting year 2015, the ongoing period of low interest rates, the negative press on life insurers and their products, as well as the reservations among many consumers about signing long-term contracts continued to negatively impact the market environment in the field of old-age provision in Germany.
The reduction in the maximum technical interest rate (guaranteed interest rate) associated with the Life Insurance Reform Act (LVRG), which came into force on January 1, 2015, also had a dampening effect on new business. In addition to this, the insurance sector prepared itself for the new European supervisory legislation, Solvency II. (You can also find further information on this in the chapter entitled “Competition and regulation”).
A survey conducted by market research institute YouGov on behalf of MLP underlines the ongoing need for advisory services in the field of old-age provision. Based on this survey, just under 40% of German citizens do not have any clear idea of how much statutory pension they will receive, while a further 30% only have a “rough idea”. Almost half (46%) do not know how much income they can expect to receive from private and occupational pension provision plans.
Low interest rate phase dampening willingness of German citizens to save for their old age
According to the 2015 Wealth Barometer of the DSGV (German Savings Bank Association), the percentage of German citizens who do not save anything on a monthly basis towards their old age increased to 40% in the reporting year. Just two years previously, this figure was 32%. The percentage also increases as income decreases. The majority (61%) of those living on less than € 1,000 per month now no longer save anything at all on a monthly basis – in 2013 this figure was just 43%. Yet, the willingness to save is also dwindling among better earners. One in four people with a monthly income above € 2,500 no longer make any monthly savings (2013: 8%).
A survey undertaken by AXA Insurance suggests that low interest rates are the main reason why the majority of the working population in Germany (59%) is not willing to sign any new old-age provision contracts, while one in two (49%) question whether private old-age provision even makes sense for them.
Holidays well ahead of old-age provision in terms of saving goals
According to a survey performed by Norisbank, the most popular savings goal of German citizens is their next holiday, for which 38% of respondents are currently saving. Significantly fewer respondents (24%) are saving for their old age.
Massive reservations at all three tiers
The difficult framework conditions described were also reflected in the market trend of various old-age provision products in the reporting year. The state is offering citizens various incentives in the form of tax breaks and allowances to encourage them to save for their own old age.
State subsidies/allowances in Germany are presented in the so-called 3-tier model:
- 1st tier Basic provision: Statutory pension and basic pension
- 2nd tier Supplementary provision: Riester pension and occupational pension provision
- 3rd tier Other supplementary provision: Pension and life insurances, capital market products
Fewer new basic pensions despite greater incentives
Alongside the statutory pension, basic provision (1st tier) also includes the basic pension or Rürup pension, whose premiums can be offset against income tax. Alongside salaried staff, the basic pension is also open to freelancers and self-employed people that are not obliged to pay into the statutory pension insurance fund. Starting in 2015, the German government supplemented and injected dynamism into the former funding framework for the basic pension. The maximum amount that can be offset against tax for a single person is to be increased from € 20,000 to € 22,172 (in the case of joint applications with a spouse/life partner, the maximum amount will increase from € 40,000 to € 44,344). In 2015, over the course of the year taxpayers were able to offset up to 80% of capital invested into a basic provision policy up to this maximum amount.
Despite this significant tax incentive, data published by the German Insurance Association (GDV) indicates that only 95,600 new basic annuity contracts had been concluded throughout the market by the reporting date on December 31, 2015. This corresponds to a decline of 14.3%.
“Wohnriester” (state-subsidised housing financing) remains popular
The supplementary pension provision (2nd tier) is essentially made up of occupational pension provision and the Riester pension. The sector-wide downward trend in sales continued in terms of new Riester contracts signed in the reporting year. According to the German Federal Ministry of Labour and Social Affairs, 84,000 new contracts were concluded by the end of Q3 2015 (financial year 2014: 292.000). There were therefore approximately almost 16.4 million Riester policies in place – which is only slightly more than on December 31, 2014. As had already been the case in the previous years, there was a clear focus on “Wohn-Riester” or “home annuity policies” among those signing new contracts, which enjoyed continued growth. However, the number of insurance policies displayed a slight downward trend.
Occupational pension provision: Lack of information and offers
The overall significance of occupational pension provision as a further component of 2nd tier provision is fundamentally great. According to the 2015 Investment Barometer published by the German Consumer Research Association (GfK), 41% of German citizens already consider occupational pension provision to be attractive. Indeed, the only investment more popular than this is the purchase of property at 75%. A survey conducted by PricewaterhouseCoopers (PwC) also comes to similarly positive conclusions. At 43%, occupational pension provision is the most popular form of provision, followed by the Riester pension and private life insurance. Yet despite this, fewer than one in three employees (29%) currently have an employer-funded provision policy in place, and just as few are making use of provision models that require them to invest their own funds (deferred compensation). The study states a lack of proper information from companies and not enough suitable offers as the main reasons for the low level of demand. For example, 61% of respondents that do not make use of deferred compensation are simply not adequately aware of this provision option.
Small and medium-sized enterprises need to catch up
The rate of penetration at companies that offer occupational pension provision stands at 54% of employees. This is the result of a survey conducted by Zurich Versicherung. Small companies in particular have a long way to go in order to catch up. More than one third (36%) do not offer their employees any form of occupational pension provision. Only 3% of larger enterprises with more than 100 employees do not offer a company pension. Small companies state a lack of employee interest and too few total employees as the main reasons why they do not offer any such provision models.
The 3rd tier is also still displaying stifled development, not least due to the lowering of the guaranteed interest rate at the start of 2015. Although almost half of Germans (48%) currently have at least one private life or pension insurance policy in place. TNS Infratest states that the low interest rate environment has led to the number of new contracts concluded falling by 33% over the last five years. At 1,318,373, the number of new standard life and pension insurance policies reported by the German Insurance Association (GDV) for the reporting year is significantly below the level recorded in the comparably strong previous year (-17.3%).
Despite all of the current discussions regarding the growing number of German citizens requiring nursing care, the field of long-term care provision displayed a downward trend in 2015. Based on figures published by the German Insurance Association (GDV e.V.), 23,954 new long term care annuity insurance contracts had been signed by the reporting date, December 31, 2015 – which corresponds to a decline of 25.0% compared to the previous year. You can find more detailed information on the topic of long-term care provision in the following section entitled “Health insurance”.
Market generally in decline, many single premiums
According to provisional figures published by the German Insurance Association (GDV e.V.), the brokered premium sum of new business with regular premiums was € 119.4 billion in the reporting year, which represents a 4.0% decline compared to the previous year’s level (€ 124,4 billion). This was largely due to the difficult market environment described. Taking into account the new single-premium business, the total brokered premium sum for new business fell to € 145.1 billion (€ 152.8 billion).
Health insurance
Health insurance continued to face a difficult market environment in the reporting year – particularly in the case of comprehensive private insurance. According to data published by the Association of Private Health Insurers (PKV), the number of persons holding comprehensive health insurance policies has been in decline for years. In 2014, the decrease was 55,700 policy holders or – 0.6%. At the end of 2014, 8.83 million German residents therefore held private comprehensive health insurance – 150,000 fewer than at the end of 2011.
The experts at the Assekurata ratings agency do not anticipate any reversal in this trend for the reporting year 2015. The industry also shares this assessment. In a study undertaken by Assekurata Solutions GmbH, more than half (58.6%) of brokers surveyed rate the current business situation in the field of fully comprehensive private health insurance as poor.
Several reasons for drop in private comprehensive insurance
There are many reasons for the downturn observed in the sector. The loss of confidence in private health insurance, largely caused by the critical press concerning the development of premiums and discussions on the potential introduction of a “citizens insurance” in the run-up to the last parliamentary elections, had a negative impact. Premiums also increased in many cases following the switchover to the unisex tariffs at the end of 2012, which served to further reinforce reservations among potential new clients. The mood among existing clients, on the other hand, is positive. According to the Continentale Survey, 81% of private health insurance policy holders are satisfied with the performance of their health insurance.
Low willingness to switch policies despite additional premiums
Since January 1, 2015, statutory health insurance funds are entitled to charge an additional premium alongside the general premium rate of 14.6%. Only two statutory health insurance funds managed without an additional premium in 2015. (You can find further information on this in the chapter entitled “Competition and regulation”)
According to a survey performed by PwC, however, the additional premiums do not as yet represent any reason to change the health insurance provider. This survey revealed that virtually all members (97%) stuck with their statutory health insurance fund in the first quarter of 2015. However, it also indicated that 60% of respondents are not even aware of the level of additional premiums required by their fund. Just as many stated that their healthcare fund had not provided them with sufficient information on this topic.
Supplementary insurance policies on the rise
The trend towards increasing the scope of services provided by the statutory health insurance system through private provision has been apparent for several years. According to data published by the Association of Private Health Insurers, the number of supplementary insurance policies increased by 1.9% to 24.34 million policies in 2014. This increase was slightly below the rise recorded in the previous year (2013: 2.0%). The Assekurata ratings agency is also anticipating gains for 2015, albeit less dynamic.
Population becoming increasingly aware of the need for nursing care
The topic of care has come of age in society. Alongside the approximately 2.6 million citizens who currently require nursing care in Germany, almost 30 million people are affected by this in their family environment. This was the conclusion of a survey undertaken by the Association of Private Health Insurers.
This is also reflected in the increase in supplementary long-term care insurance policies. According to the Association of Private Health Insurers, the number of state-supported supplementary long-term care insurance policies (the so-called “Pflege-Bahr”) increased by 55.3% to 558,600 contracts in 2014. Despite the pronounced increase, however, this still represents a low level when viewed absolutely. The number of unsubsidised supplementary policies increased by 4.6% to 2.48 million. As such, a total of over 3 million insurance policies were in place in this sector at the end of 2014 (2013: 2.7 million). Yet new contracts in the field of long-term care annuity insurance, which represents the most comprehensive coverage, displayed a downward trend (please refer to the chapter entitled “Old-age provision”).
The Assekurata ratings agency believes that growth in the field of tax-privileged long-term care provision may have slowed significantly in the reporting year. Experts are blaming the “wait and see” attitude being displayed by clients and brokers when it comes to long-term care provision on the upcoming legal changes associated with the second Care Enhancement Act (PSG), which was approved by the Bundestag in November 2015. The new legislation has been in force since January 1, 2016. (You can find further information on this in the chapter entitled “Competition and regulation”)
Wealth management
In the reporting year, the market environment in the field of wealth management was largely characterised by the ongoing period of low interest rates and high volatility on the capital markets. In light of the potential change in interest rates, investors focused in particular on the monetary policy decisions of the central banks, above all in the US and Europe. However, economic developments in China, national debt crises in countries such as Greece and increased terror threats also influenced the markets in the last financial year.
Worldwide wealth on the rise
Despite the current period of low interest rates, global private wealth continued to display significant increases worldwide in 2014. According to the Global Wealth Report 2015, published by the Boston Consulting Group (BCG), personal assets increased by almost 12% to US$ 164 trillion. At 6.6%, however, growth in private monetary assets in Western Europe was only half this level. This was largely due to the euro crisis. Despite this, the number of dollar millionaires in Germany increased by 0.9% to 1.14 million persons in 2014. In 2013, growth was still 11.4%. According to the Global Wealth Report 2015, published by Allianz, the average net assets of German citizens only increased by 1% to € 44,769; in the previous year, the increase was more than 5%.
Secure and liquid investments remain popular
Based on the latest figures of the German Bundesbank, the trend towards liquid and low-risk investments also continued in the reporting year in Germany. The total monetary assets of private households in Germany at the end of Q3 2015 were € 5,210 billion – and therefore more than 4% higher than one year previously. Over € 83 billion was deposited in the first half of the reporting year. Most of this took the form of demand deposits, including cash.
Mixed and mutual equity funds on the rise
Investment funds also recorded positive cash inflows in the reporting year. Based on information provided by the German Association of Investment and Asset Management (BVI e.V.), total assets managed by the German investment industry in Germany at the end of 2015 were € 2,601 billion and thereby 9.1% higher than in 2014. Institutional investors made a significant contribution to this, meaning that investments in special funds increased by 8.7% from € 1,231 billion to € 1,339 billion. This market is relevant for the MLP Group due to the services provided by FERI. As of December 31, 2015, mutual funds rose by 11.9% to € 883 billion in total. At € 38.6 billion, mixed funds recorded by far the greatest cash inflows, followed by mutual equity funds at € 21.1 billion and fixed income funds at € 6.3 billion. In the previous year, investors were still withdrawing massively amounts from mutual equity funds.
Private investors are therefore adopting a slightly more offensive investment approach than in previous years. Measured against market conditions, however, they are still displaying reservations regarding riskier forms of investment.
Ongoing consolidation in private banking and wealth management
The market for providing consulting and asset management services to high net worth individuals, which we process via FERI, has become more complex and fiercely contested since the financial and economic crisis. The competitive environment is characterised by ongoing consolidation in the field of private banking and wealth management.
From the client perspective, it is also important to note that the decision-making cycles of investors remain long and the willingness to sign new contracts remains fairly low. In light of the low interest environment, institutional investors in particular are increasingly looking for alternative investments.
Real estate still in focus
In light of the ongoing period of low interest rates, investments in both owner-occupied and investment properties are becoming increasingly important with a view to long-term capital accumulation. According to the 2015 Wealth Barometer, 53% of German citizens consider owner-occupied property the most suitable form of investment for this purpose, while 28% prefer to invest in investment properties for capital accumulation.
Competition and regulation
The competitive situation in the German market for financial services did not change significantly for the MLP Group in 2015 compared to the previous year. The sector remains very heterogeneous and is characterised by a high level of competitive pressure and a trend towards consolidation. The providers include numerous banks, insurance companies and free finance brokers. However, the quality of consulting provided by these companies can vary quite markedly. In addition to this, competitive pressure is growing throughout the entire sector as a result of new, innovative market actors (so-called fintechs).
Altered framework conditions drive consolidation
To sustainably increase the degree of transparency and consulting quality in the market, the legislator has already implemented various regulatory changes in the last few years. These changes also had a lasting effect on the framework conditions in the last financial year, and their implementation will continue to drive forward consolidation of the market. MLP was an early adopter of numerous requirements that the legislator is now stipulating with new sets of rules and standards. We see this as a competitive advantage.
Life Insurance Reform Act (LVRG) having lasting effects
On January 1, 2015, important changes came into force within the scope of the Life Insurance Reform Act (LVRG) that, in some cases, will also have lasting effects on the competitive situation in the market as a whole.
As expected, the reduction in the maximum technical interest rate (guaranteed interest rate) from 1.75% to 1.25% in the reporting year contributed to continued reservations among German citizens in terms of signing long-term old-age provision contracts. The reduction of the maximum zillmerisation rate from 4% to 2.5% also put greater pressure on margins in the market, as highlighted by a survey of independent brokers performed by market research institute YouGov. Based on this, around three quarters of independent brokers (77%) are concerned about the massive wave of consolidation among brokers as a result of the Life Insurance Reform Act (LVRG). The majority (59%) have already observed a drop in brokerage business, as well as reduced remuneration (85%) and greater reversal liability (78%).
As expected, the YouGov survey also indicated that the reduction to the maximum zillmerisation rate led to changes in remuneration systems. Indeed, just under two thirds of companies (64%) had already reduced their acquisition commissions, while more than 40% had also increased their average trailer commissions. As a result of the changes to commission models, the majority (58%) of brokers expect to suffer a moderate to severe loss in earnings in the long-term.
As a quality provider with a large and discerning client base, MLP recorded only comparably minor effects on its own business for the financial year 2015. However, the pressure on margins in smaller and significantly less quality-driven parts of the market has increased significantly, which in our opinion will continue to drive forward the ongoing consolidation process in the market.
Stricter banking regulation in Europe
As was already the case in previous years, clarification of details regarding implementation of Basel III in the European Union (EU) continued to occupy the banking world in Europe in the reporting year. On October 1, 2015, the liquidity coverage ratio (LCR) defined in the legislation came into force in the EU as a binding minimum requirement. The objective of the LCR is to cover the liquidity requirements of the next 30 days by securing sufficient high-value assets that can be liquidated at short notice. To make the transition process towards the new minimum requirement easier for institutions, a gradual increase in the degree of fulfilment has been introduced, whereby 100% fulfilment must be secured in 2018. As an institute with a banking licence, these regulations also apply to MLP Finanzdienstleistungen AG and thereby to the MLP Group. MLP complies with all requirements.
Harmonised banking supervisory authority
On December 19, 2014, the European Banking Authority (EBA) published its final guidelines on the Supervisory Review and Evaluation Process (SREP). With this step, a harmonised framework for the monitoring and evaluation process as per Basel III has been created for the first time for the responsible supervisory authorities within the EU. The guidelines should make the risks of banks more transparent and comparable. In the mid-term, the SREP Directive will ultimately lead to further harmonisation of supervisory legislation and supervisory practice within the EU. In addition to this, the Federal Financial Supervisory Authority (BaFin) is currently working on redrafting the minimum risk management requirements in Germany (MaRisk), which will likely lead to further revisions.
Greater protection for small investors
On April 23, 2015, the German Bundestag passed the Retail Investors Protection Act (KlASG). The new legislation provides consumers with better protection from high-risk and non-transparent financial products. It requires greater and more up-to-date information for investors, as well as sales restrictions for providers of investment products, and also strengthens the supervisory powers governing the financial market.
New statutory health insurance premiums
On January 1, 2015, the Act to Further Develop the Financial Structure and Quality of the Statutory Health Insurance System (FQWG) came into force. With this new legislation, the general premium rate for statutory health insurance was reduced from 15.5% to 14.6%. The reduction is split 50/50 between employee and employer. Alongside this, there is an additional premium that the statutory health insurance funds adjust regularly on the basis of their financial position. In 2015, this additional premium averaged 0.9%. It is paid exclusively by employees and determined individually by the respective funds.
Pension contributions down, income thresholds up
As a result of greater reserves, the pension fund was able to reduce the premium rate for pension insurance in 2015 by 0.2% to 18.7%. At the same time, the income thresholds increased in the fields of pension and health insurance. In the general pension insurance fund (West Germany), the threshold increased from € 5,950 to € 6,050, while in Eastern Germany it rose from € 5,000 to € 5,200 per month. The income threshold for statutory health insurance increased to € 49,500 in 2015, following € 48,600 in the previous year. The statutory insurance limit increased from € 53,550 to € 54,900.
Demand for independent consulting services remains high
The latest surveys also indicate that independent financial consultants, i. e. providers such as MLP that do not offer any of their own products, continue to play a key part in the brokerage of old-age provision products in Germany. According to the 2015 Sales Channel Survey performed by corporate consultancy Towers Watson, these were the third most important specialist consulting sector in the industry in terms of life and pension insurance policy sales. Their market share of brokered new business was 26.5%. Tied agents, which represent just one company, took 2nd place with 28.7%, just behind the banks at 29.5%.
The latest figures from Towers Watson indicate that independent consultants also continue to play a key role in the brokerage of private health insurance policies. With a market share of 34.3%, they are the second most important consultant group after the tied agents.
