FORECAST
Future industry situation and competitive environment
The aforementioned influence of the individual fields of consulting on the operating business segments applies accordingly to the future industry situation and the competitive environment.
Old-age provision
In future, private and occupational pension provision will have to assume an increasingly important role in Germany. Despite the reservations currently being felt by many citizens, there is still massive market potential in the medium to long term. This is the conclusion of a survey conducted by the German Insurance Association (GDV). The majority of German citizens (56%) would be prepared to invest more money into private old-age provision plans – if the state provided more incentives to do so. Most citizens are acutely aware of the need to take action. Indeed, 84% are convinced that private provision is the only way for pensioners to maintain their standard of living in future. Yet despite this, not even half (48%) are currently putting additional money aside for this. The situation is even more acute among 18 to 24-year olds, where only one in four (25%) has private provision in place.
The majority of German citizens do not wish to restrict themselves
According to a survey performed by TNS Infratest, only one in three German citizens is willing to accept financial restrictions in order to make additional savings for private old-age provision. A survey performed by the German Pension Institute (DIA) indicates that even only one in four citizens are willing to save more towards this goal in the next twelve months – despite the fact that two thirds of German citizens know that their own provision plans are inadequate. The main reasons stated by German citizens for not investing in old-age provision plans are that they simply do not have enough money to save for their pension (34%) and that they have other priorities (44%). This was the result of the “Investor Pulse” survey performed by wealth management company BlackRock.
Increasing risk of old age poverty and worries of a drop in standard of living in later life
More than half of those in gainful employment in Germany (59%) state that they are increasingly worried about the risk of old age poverty. This was the result of a survey conducted by AXA. Based on this, 39% of those in active employment expect to suffer a reduction in their quality of life when retired. This is one third more than in the AXA survey conducted ten years ago (29%). Almost half of those in gainful employment (44%) believe that their retirement income will not be sufficient. These worries appear to be justified, as the number of poor pensioners has risen sharply since 2005 – from 10.7% to 15.6%, as indicated by the latest figures from the German Federal Statistical Office.
Statutory pension continues to decline
According to the latest Pension Insurance Report of the German government, already back in 2014 the standard pension level (net before taxes) represented 48.1% of the last income earned. This figure is likely to drop to 44.6% by 2029. A survey commissioned by the German Insurance Association (GDV e.V.) and performed by the Prognos Institute predicts that the pension will drop even further to 39% by 2040.
Life expectancy significantly underestimated
Most German citizens massively underestimate their own life expectancy – and thereby also how long they will need to live on their old-age provision plans. This is according to a survey conducted by the ERGO Insurance Group, which states that only one in five German citizens (20%) expects to live to 90 or beyond. However, anywhere from half to two thirds of German citizens (55% to 70%) are actually expected to reach this age. Private pension insurance provides peace of mind for this so-called longevity risk. According to a survey conducted by the Allensbach Institute on behalf of the German Insurance Association (GDV), two thirds (68%) of German citizens already wish to sign up for a lifelong guaranteed private pension, which is 8% more than in 2011.
Occupational pension provision on the rise
Occupational pension provision is set to become even more important in Germany. A study performed by Zürich Versicherung predicts that 61% of employees working for a company that offers occupational pension provision will make use of this additional insurance in 2016. This corresponds to a 7% increase in the penetration of occupational pension provision within just one year. Added to this is the fact that one in six companies (17%) that do not currently offer any occupational pension provision schemes are intending to do so.
According to a survey performed by Towers Watson, almost half of German companies (46%) are anticipating increased demand for employer offers in the fields of healthcare and occupational pension provision by 2020. The majority of German companies surveyed therefore believe that it will be their duty in future to provide old-age provision (64%) and health provision (60%) for their staff. There is also a great deal of catching up to be done, as only one in three companies (32%) believe that they are already well-positioned in terms of the provision options they offer their employees up to 2020. Almost exactly the same number (34%) consider it unlikely that their existing offers will remain viable in the mid-term. This leads to significant market potential for consulting services in the mid-term.
Potential improvement of framework conditions
The Chair of Taxation and Accounting at the University of Würzburg has been commissioned by the German government and is currently working on drafting improvement proposals for the tax-related and social law framework conditions of occupational pension provision. The objective here is to remove existing barriers and create new incentives for extending the scope of occupational pension provision. Results of the study are expected to be published in Q1 2016. At the same time, however, the world of politics can potentially also have negative effects. These for example include the new funded “Pension for Germany” (Deutschlandrente) currently being discussed in the coalition. As a centrally managed pension fund in state hands, this could potentially compete with current private and occupational pension provision plans through insurers and investment companies.
New old-age provision products still receive too little attention
In light of the ongoing period of low interest rates, life insurers are today facing significant challenges. In the field of old-age provision, providers are currently streamlining their efforts on new products with modified forms of guarantee.
Based on this, the analyst company Assekurata expects product selection and accompanying consultancy services to become more individual and complex. In addition, experts are predicting that alternative occupational disability insurance policies with reduced scope will become more important. This is because these policies can also be aimed at clients with increased occupational risks who would otherwise simply not be able to afford full coverage.
Life Insurance Reform Act (LVRG) leads to changes in cost structure
According to a survey performed by the German Pension Institute (DIA), one-off contract and marketing expenses have fallen by an average of 28.6% for classic pension insurance policies, by 25.5% for classic Riester pensions and by 33.5% for unit-linked Riester pensions since the start of 2015 as a result of the Life Insurance Reform Act (LVRG). The survey largely attributed this development to the reduction in the maximum zillmerisation rate.
Although the market potential remains promising in the mid-to-long-term, no real improvements should be expected in the short-term. Due to the ongoing period of low interest, German citizens are likely to continue displaying reservations in terms of signing long-term provision contracts in 2016. The Insurance Markets Taskforce of the German Insurance Association (GDV) is forecasting a drop in premium income in the field of life insurance of around 1% for 2016. Drops are being predicted both in regular premium income and the single-premium business.
Health insurance
Further reforms are to be expected in the German healthcare system over the course of the next few years. This is because both statutory and private health insurances are facing future financing challenges.
MLP believes that many statutory insurance policy holders will continue to look for sustainable and attractive alternatives, for example by switching to private health insurance or seeking to improve their individual cover with private supplementary insurance policies.
Statutory health insurance providers charge ever higher additional premiums
People insured in the statutory healthcare system can expect to see significant increases in their premiums over the next few years. Based on estimates of the National Association of Statutory Health Insurance Funds (GKV-Verband), the additional premium for the healthcare funds could double by 2019 to between 1.4% and 1.8%. In 2015, more than 60% of all statutory insurance policy holders paid an additional premium of 0.9%. The average additional premium for 2016 will be 1.1%. According to estimates of the Association of Statutory Health Insurance Funds (GKV-Verband), the premium rate for statutory health insurance is set to rise from its current level of 15.5% to between 16.0% and 16.4% by 2019.
MLP believes that the increases in additional premiums will motivate more people who are currently paying into the statutory healthcare system to switch to private policies – thereby creating new market dynamics in the mid-term. According to ratings agency Assekurata, however, no such desire to switch to private policies should be anticipated in the short-term in the field of comprehensive private insurance, despite the fact that the additional premiums in the statutory health insurance system are increasing.
New tariff change guidelines should make private health insurance more attractive
Private health insurance providers are keen to use a new guideline to make it easier for customers to switch tariffs. The clear and binding code of conduct for insurers, drafted by the industry association, is set to be adopted bindingly by all participating companies no later than 2016.
The Assekurata ratings agency believes that the new guidelines will make private health insurance more attractive. At the same time, experts recommend those wishing to make the switch to attend a consultation with a broker. In fact, this is also explicitly stated in the guidelines. MLP expects to see positive stimulus from this and has extended its advisory services in this field accordingly (you can find further information on this in the chapter entitled “Performance”). The Insurance Markets Taskforce of the German Insurance Association (GDV) is forecasting a slight overall increase in premium income of 1.5% in the field of private health insurance for 2016.
Additional private health provision extremely important for the vast majority
Many of those paying into the statutory health insurance system remain sceptical about the future of the healthcare system in Germany. According to the “Continentale Study 2015”, almost two thirds of German citizens surveyed (62%) do not believe that the statutory health insurance system will be able to provide them with proper medical care in future. More than three quarters (76%) believe that good healthcare provision can only be secured through additional private provision either now or in the future.
Development of the German healthcare system (all figures in %)
Supplementary insurances with new flexible tariffs
A representative survey published by MSR Insights confirms that private supplementary insurance policies in particular hold great growth potential. In addition to this, the latest Healthcare Barometer published by PwC indicates that just under two thirds (61%) of statutory insurance policy holders in Germany currently do not have any supplementary insurance in place.
The Assekurata ratings agency expects insurers to react to the slightly declining growth rates in the field of supplementary insurance with new, flexible modular out-patient care tariffs. These systems allow customers to select supplementary insurance coverage more specifically according to their own personal requirements.
Long term care provision offers great growth potential in the mid-term
The Second Act to Strengthen Long-term Care, which came into force on January 1, 2016, is likely to provide new impetus for the private long term care provision market (you can find more detailed information on this in the forecast chapter entitled “Competition and regulation”). This long-term care reform will also require insurers to revise their private supplementary policies in the field of long-term care provision. The reason for this is that for many tariffs the level of services provided is based on the care level defined in the statutory system.
The Assekurata ratings agency considers the restructuring of tariffs as one reason why growth in the field of supplementary long-term care insurance has slowed down recently. However, the experts generally agree on the future need for private provision to cover long-term care. According to a survey of brokers undertaken by Assekurata Solutions, more than three quarters of the brokers questioned (80%) believe that their customers have a high to extremely high need for coverage in this field. Assekurata expects further improved tariffs to hit the market in the course of the Care Reform Act in 2017 – when the three care levels currently defined will become five degrees of care that cater more effectively to individual nursing care requirements. A market study undertaken by MSR Insights also suggests that there is significant growth potential here – as not even one in five policy holders currently has a private long-term care insurance policy in place.
Wealth management
Ever greater wealth will increase the need for high-quality wealth management services in the long term. In its 2015 Global Wealth Report, the Boston Consulting Group expects global private assets to increase by just under 35% annually and exceed US$ 222 trillion by 2019. The report also anticipates significant gains for Western Europe, where monetary assets are likely to increase by almost one quarter to US$ 49 trillion by 2019.
Growing need for advisory services in the field of old-age retirement planning
Just under a third of German citizens (30%) aged between 45 and 65 with disposable wealth of at least € 200,000 intend to convert their monetary assets or invest them in a more suitable solution for their retirement. This was the result of a YouGov survey on the topic of old-age wealth planning. One in four (25%) are also planning to seek out corresponding advisory services within the next 18 months – primarily with independent financial consultants (35%) and asset managers (29%).
German citizens expect interest rates to remain low
Only one in five German citizens (20%) expects interest on investments to increase again in 2016. Almost half (44%) believe that the rates will remain at their current historical low level. 25% even believe that they may drop further. This is according to a recent survey conducted by Postbank.
Wave of inheritance in Germany
Over the next few years, massive transfers of wealth are to be expected in Germany. Around € 3.1 trillion will be inherited by private households by 2024 – which represents just under 30% of total assets held by private households in Germany. This is the conclusion of a survey conducted by DIA, according to which an average of € 363,000 is to be passed on per inheritance.
Almost one third (31%) of respondents in a YouGov study are also planning to use inheritances in their retirement plans – alongside their own real estate assets and life insurance policies; 44% are already doing this, at least in part.
Increased consolidation among independent wealth management companies
Individual independent asset managers are likely to disappear from the market over the course of the next few years as a result of poor competitiveness – this is the conclusion of the UVV-Study 2015 – Focus on Germany by Simon, Kucherer & Partners. Around 20% of independent asset managers in Germany manage a volume of less than € 50 million. Based on these values, the authors of the study believe that it will no longer be possible for such managers to continue operating in the long-term due to the ever stricter regulatory and technical requirements.
Alternative investments increasingly in demand among large-scale investors
Due to the continuing low interest rate environment, institutional investors in particular are increasingly looking for alternative investments. PwC expects that around US$ 15.3 trillion of global assets under management will be invested in alternative investments in 2020 – almost double the level recorded in 2013 (US$ 7.9 trillion). According to PwC, only passively managed funds, in particular index funds, are likely to grow slightly faster.
Market environment remains difficult
All in all we expect that 2016 will be a challenging year for investors. Based on estimates of FERI, trust in the effectiveness of monetary policy has already been dented. If this trend continues, the global financial markets could encounter setbacks in 2016. Although shares could in principle benefit from continued quantitative easing, the risk that this effect may eventually cancel itself out is growing. In general, the capital market environment is likely to remain difficult and investors are likely to remain risk-averse. Within this context we expect to see an increased need for consulting services in the field of professional wealth management among all of the Group’s target client groups over the course of the next few years.
Non-life insurance increasingly important
Non-life insurance will play an increasingly important role in the market in future. Independent brokers in particular expect the non-life insurance business to become far more important over the course of the next few years. According to a survey of insurance brokers and multiple agents performed by AssCompact, 40% currently consider composite business to be very important. Five years ago, only 30% believed this to be the case. For 2020, 60% of respondents already expect it to be very important. Many market actors are keen to compensate for their declines in revenue in the old-age provision business, which were caused by introduction of the Life Insurance Reform Act (LVRG), by expanding their non-life insurance business.
Positive development of premium rates anticipated
With regard to premium increases, the Insurance Markets Taskforce of the German Insurance Association (GDV) expects to see growth in the field of property and casualty insurance in 2016. However, the increase in the field of private non-life insurance is likely to be below the 2015 level (around 3%). Since they are tied to company success, premium development in the field of non-private non-life insurance could benefit from the favourable economic momentum observed in 2015. The German Insurance Association (GDV e.V.) anticipates an overall increase in premiums for 2016 of around 2.5% (2015: 2.6%).
Competition and regulation
The entire market for financial services and the insurance sector are facing consolidation. Germany is considered to be the market with the greatest potential in Europe, in which both national and international service providers are competing. Due to stricter regulations, pressure is in particular mounting on low-level providers, which will lead to a further reduction in the number of market actors.
Basel III with stricter requirements by 2019
By 2019, the capital requirements pursuant to Basel III will increase further. Various capital buffers will be implemented from 2016 onwards. The requirements associated with the capital conservation buffer in particular will toughen up from 2016 onwards (0.625%). MLP is ready for these stricter capital requirements. Our capital planning is always set up to exceed the minimum requirements.
Further consolidation among healthcare funds
Further consolidation should also be anticipated in the healthcare sector due to increasing cost pressure. The number of statutory health insurance funds already dropped quite sharply in previous decades. While there were 1,815 healthcare funds in 1970, this number had already almost halved to 960 by 1995 and currently stands at just 124 (previous year: 132).
According to a survey performed by PwC, the majority of statutory health insurance funds anticipate further consolidation. In future, reducing costs is likely to be the greatest challenge. Indeed, two thirds of respondents believe that 40 to 100 statutory health insurers will be enough in future.
Ongoing concentration among brokers
Similar trends are also to be anticipated among insurance brokers in Germany – not least due to the Life Insurance Reform Act (LVRG), the changes of which came into force in 2014 and 2015. This is the conclusion of the survey 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. The number of brokers has already dropped significantly in the last few years, falling from more than 260,000 in 2010 to around 233,000 last year. MLP believes that this is likely to continue affecting small brokerage offices and brokers with poor consulting services and portfolios. This is particularly true of market actors that do not cover a broad spectrum and are largely dependent on acquisition commissions. In addition to this, competitive pressure is growing throughout the entire sector as a result of new, innovative market actors (so-called fintechs).
Solvency II comes into force on January 1, 2016
Set primarily against the background of the new European supervisory legislation, Solvency II, the entire insurance market is likely to face further consolidation processes in future. In March 2015, the German Bundesrat approved the Act to Modernise Financial Supervision of Insurance Companies (VAG-Novelle). This legislation transposes the EU Solvency II Directive into German law. The new rulings came into force on January 1, 2016 and represent the largest reform to insurance supervision for decades. The new Insurance Supervision Act (VAG), which rests on three pillars, modernises and harmonises insurance regulations in Europe. The first pillar requires insurance companies to submit a risk-based/fair value-based measurement of their investments and benefit obligations. The second pillar presents requirements pertaining to business organisation (governance), while the third pillar extends the reporting obligations of insurers.
Debate on maximum technical interest rate
The plans to abolish the maximum technical interest rate (guaranteed interest rate) in its present form, which were discussed within the German government in the course of implementing Solvency II, are off the table for the time being. However, during the course of 2016 it is to be reviewed as to which extent the guaranteed interest rate needs to be adapted to market conditions. A potential adjustment is then likely to be made on January 1, 2017. Within in the scope of reviewing the Life Insurance Reform Act (LVRG) it is to be assessed in 2018 as to whether or in what form a guaranteed interest rate remains necessary as a supervisory instrument. Due to the interest rate policy of the central banks and the regulations, many insurers have already launched new products without a guaranteed interest rate.
MiFID II on the home straight
Back in April 2014, the European Parliament already approved a tightening of the Markets in Financial Instruments Directive MiFID II. National regulations for financial services, their transparency and investor protection need to be transposed into national legislation by July 2016 and will then be binding from January 2017 onwards. However, the European Commission has postponed the start of MiFID II by one year. The draft bill of the Federal Finance Ministry for legislation to reform financial market regulations (Financial Market Reform Act) was presented on October 19, 2015. Among other things, this legislation transposes MiFID II into German law. The main areas affected by the new legislation are the German Securities Trading Act (WpHG), the German Banking Act (KWG) and the German Stock Exchange Act (BörsG). The objectives include improved transparency and better investor protection, both of which MLP generally welcomes.
The removal of consultation records in their present form is new. These are to be replaced by a so-called “suitability declaration”. In addition to this, the obligation to record telephone conversations is to be included within the scope of the acceptance, brokerage and execution of customer orders.
Act to Strengthen Long-term Care comes into force
The Second Act to Strengthen Long-term Care, which provides for noticeably extended and improved support for those in need of care and their families in Germany, came into force on January 1, 2016. Among other things, it includes a new review procedure, introduction of a new concept of care dependency, as well as the restructuring of benefit rates associated with this. The amendments are scheduled to come into force on January 1, 2017. In future the previous three care levels will be replaced by five standard degrees of care which apply uniformly for all those in need of care. At the same time, the premium rate for long-term care insurance is to increase once again from 2017 onwards – by 0.2% to 2.55% for parents and 2.8% for those without children.
Uniform product information sheet for investment products
The regulation on basic information sheets for investment products (PRIIP - packaged retail and insurance-based investment products) has already been passed. In future, providers of financial products are to draft a uniform product information sheet that describes the most important features in a brief and comprehensible way. Totalling three pages, the document for example includes a presentation of the opportunities and risks, as well as all direct, indirect, one-off and ongoing costs. The PRIIIP regulation applies to investment products such as funds and certificates, as well as to insurance investment products.
Fee-based investment advisory services: resolving issues with legacy portfolios
In the light of transposing MiFID II into German law, focus is once again shifting toward fee-based investment advisory services. The German government is keen to also include the duality between fee-based consulting and commission-based consulting in the new legislation. Commission-based consulting is therefore still permitted if payment of the commission is intended to improve the quality of the service provided and does not lead to any conflict of interest.
MLP already reorganised its compensation structure for investment advisory services back at the start of 2012. As such, it complies with all the important prerequisites for potential registration as a fee-based investment consultant in line with the Fee-Based Investment Advice Act (HAnlBG). However, we have not submitted an application to date, largely because this would lead to complications in advising clients with old contracts due to the impractical nature of the legislation. From our perspective, the remaining details of the Financial Market Reform Act as per MiFID II still require clear rulings and clearly defined boundaries for old contracts in the field of fee-based investment advisory services.
As is the case for all other market actors, MiFID II and the Financial Market Reform Act will lead to significant implementation costs for MLP in areas including IT systems, cost transparency, customer information and reporting. With MLP’s current position in the field of wealth management, however, we believe that we are well equipped to handle implementation of the requirements.
MLP already offers fee-based consulting in many fields
MLP is generally open to fee-based consulting, not just in the field of wealth management. We already offer fee-based services in the fields in which our clients request this. These include consulting on medical practice financing and certain areas of occupational pension provision. However, we remain firmly convinced that the quality of investment advice does not depend on the type of compensation, but rather on correct consultant training, the quality of the product selection and transparency for the client. We already consider ourselves to be very well-positioned in this regard through our business model, the extensive qualification and further training opportunities we offer our consultants, as well as our quality-assured partner and product selection process.
EU Mortgage Credit Directive: new rules for brokers
The German Bundestag and Bundesrat are currently discussing transposition of the EU Mortgage Credit Directive into German law. The German government initiated a corresponding draft bill in July 2015. This must now be transposed into national law by March 21, 2016.
The new law requires banks to investigate the financial and economic situation of clients particularly carefully when issuing mortgages. After all, anyone purchasing a home faces serious financial commitments and risks.
In addition to this, mortgage brokers must in future hold a certificate of proficiency, be registered and sign up for professional liability insurance. In the course of implementing the new directive, the German government is introducing the concept of independent fee-based mortgage consultants.
MLP is successfully active in the brokerage of mortgages. Basically our consultants are well-trained for this field of consulting. Depending on the legal implementation, it is necessary for some consultants to pass the future examination at the chamber of industry and commerce (further information can be found in the chapter entitled: Employees and consultants).
Final sprint towards Insurance Distribution Directive (IDD)
In parallel to the tightening of the Markets in Financial Instruments Directive MiFiD II, the EU is also working on a new draft of the Insurance Distribution Directive. The new Insurance Distribution Directive (IDD) is to govern all sales activities of the insurance industry in Europe. The objective is to increase both transparency and consumer protection. In addition to this, the IDD sets important standards for better quality consulting with uniform principles throughout Europe. For example, brokers will in future not only have to provide evidence of their basic training, but also of their ongoing vocational further training. The directive was signed by the European Parliament and the Council of the European Union at the start of 2016. The individual EU member states then have two years to transpose the legislation into national law. The fact that the IDD does not contain any general ban on accepting commission and that consumers are free to choose between fee-based and commission-based remuneration should also be seen as positive.
Well equipped to handle new regulatory requirements
In summary, we consider our current competitive situation as good, thanks largely to the sustainable diversification of our business model. We were also early adopters of numerous requirements that will become binding law in future and have complied with all disclosure obligations. Thanks to its banking licence, MLP also clearly differentiates itself from other, less strictly supervised market actors in this respect. Implementation expertise is required in order to comply with the legal documentation, qualification and transparency obligations. MLP believes it is generally well prepared for this. But irrespective of this, the regulatory developments overall will certainly represent a challenge.
