Industry situation and competitive environment
The vast majority of MLP's total revenue is generated from the following four fields of consultancy: old-age provision, wealth management, non-life insurance and health insurance. In the 2017 financial year these fields together represented around 94% of total revenue. Revenues in the fields of old-age provision and health insurance are generated in the financial consulting segment. Wealth management revenue is generated at the FERI and banking segments. Alongside the DOMCURA segment, revenue in the non-life insurance area is also generated at MLP Finanzberatung SE.
The main factors that had a particular influence in the market environment and the results of operations in the four aforementioned consulting area in 2017 are described below.
The old-age provision sector once again faced major challenges in 2017. The ongoing period of low interest rates and the reservations displayed by many consumers when it comes to signing long-term agreements have had a lasting negative impact on the market environment in the old-age provision area in Germany. This situation was compounded further by a reduction in the maximum actuarial interest rate from 1.25% to 0.90% on January 1, 2017, which not only affected the attractiveness of life insurance policies. In fact, this reduction also led to higher premiums for term life, funeral costs, long-term care pension and, above all, occupational disability insurance policies. Based on estimates of the Assekurata ratings agency, this development comes at an unfavourable time for life insurers, who are increasingly focusing on occupational disability insurance as one of the few attractive growth areas.
Product landscape undergoing change
Life insurers are addressing the described challenge with innovations in the product landscape and are increasingly electing to offer their old-age provision products with a flexible interest rate or without any guaranteed interest rate. According to a survey performed by Assekurata, classic life and pension insurance policies have become a niche product for life insurers. As a result of the positive performance in the stock markets, they are more interested in unit-linked policies and biometric products, such as occupational disability insurance.
Low interest rate phase leaving German citizens at a loss
The low interest rate phase is generating considerable concerns among German savers: according to the 2017 Wealth Barometer of the Deutsche Sparkassen- und Giroverband Financial Group, more than one in two Germans (53%) are worried about the European Central Bank's interest rate policy. Just under a third (31%) are at a loss as to how they can achieve their own old-age pension provision goals in light of the ongoing period of low interest rates.
Falling saving rates
According to the 2017 AXA Germany Report, 61% of German citizens no longer consider themselves to be adequately covered for their retirement, primarily due to low interest rates. In addition to this, more than half (56%) of those in active employment now expect their quality of life to deteriorate in their old age, which represents a considerable increase from 40% one year previously. Although 79% of those in gainful employment consider financial insurance coverage in their old age as one of their three most important life objectives, German citizens are only saving an average of € 130 per month for their old-age provision according to the AXA Report. This represents 16% fewer than one year previously (2016: € 155). The most frequent reason for inadequate provision, stated by 57% of respondents, is "insufficient income and assets". The second most common reason given was "inadequate support regarding the topic, for example in the form of state subsidies/incentives" (21%). A "lack of knowledge or clarification on the topic" was the third most common reason (11%).
Holiday more important than old-age provision
According to a survey published in 2017 by market research institute Forsa, most German citizens prefer to save for their next holiday than for their private old-age provision. Indeed, 57% would rather set aside money for a trip than for their retirement. Almost a third of respondents are willing to dip into other savings or financial reserves rather than having to skip holidays altogether. According to Forsa, German households spent an average of € 4,307 on all holiday travel in 2016.
Difficult framework conditions discernible in all three tiers
The difficult framework conditions described were reflected in the market trend of the various old-age provision products in the reporting year, although 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:
- Basic pension provision: statutory pension and basic pension
- Supplementary pension provision: Riester pension and occupational pension provision
- Other supplementary pension provision: pension and life insurances, capital market products
Improved incentives for basic pension not having any impact
Alongside the statutory pension, basic pension provision (1st tier) also includes the basic or Rürup pension, whose premiums can be deducted from income tax. Alongside salaried staff, the basic pension is also open to freelancers and self-employed persons who are not obligated 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 to make it more attractive. The maximum tax-deductible amount in 2017 was € 23,362 for single persons (€ 46,724 for married couples). In 2017 taxpayers were able to deduct 84% of capital invested in a basic provision policy over the course of the year from income tax as extraordinary expenses.
Despite this significant tax incentive, data published by the German Insurance Association (GDV) indicates that only 81,000 new basic pension agreements had been concluded throughout the market by the reporting date on December 31, 2017 (2016: 96,000). This corresponds to a decline of 15%.
Growth only in Wohn-Riester home annuity policies
The supplementary pension provision (2nd tier) essentially comprises the Riester pension and occupational pension provision. The sector-wide downward trend in the sale of new Riester contracts continued in the reporting year. According to the German Federal Ministry of Labour and Social Affairs, the total number of Riester contracts in place fell to 16.53 million at the end of Q3 2017 – which represents a drop of 7,000 contracts compared to the figure as at December 31, 2016. As had already been the case in previous years, the clear focus on "Wohn-Riester" home annuity policies and "investment fund" polices with regard to signing new contracts continued in the reporting year. However, the number of "Riester" pension contracts displayed a sharp downward trend.
Occupational pension provision: Greater support by law
The overall significance of occupational pension provision as a further component of 2nd tier provision is fundamentally considerable. According to a survey conducted by the German Consumer Research Association (GfK), 42% of German citizens already consider occupational pension provision to be one of the most attractive forms of saving. Indeed, with 76% the only investment more popular than this is the purchase of real estate.
Differences can, in particular, be found in terms of company size here. Indeed, virtually 90% of large enterprises with more than 2,000 employees today offer their workforce occupational pension provision. However, only around two thirds of these employees actually have occupational pension provision in place. The potential is even greater at small and medium-sized enterprises. Only 71.5% of small enterprises offer their workforce occupational pension provision and only 41.1% of these employees are currently taking up the offer. Only 76.4% of enterprises with up to around 200 employees offer such a concept, which is taken up by just 44.7% of employees.
Occupational pension provision in Germany enjoys both tax and social security subsidies. At the start of June 2017, the German Bundestag passed legislation to strengthen occupational pension provision in Germany, which could provide positive stimulus to this area. The key points of the new legislation focus, in particular, on increasing the tax subsidy to 8% (previously 4%) of the income threshold per year, as well as a direct financial contribution for low earners. Anyone earning up to € 2,200 gross per month will then receive up to € 144 in state subsidies for an employer's contribution of up to € 480 per year. You can find further details on this in the forecast section under Competition and regulation.
Life and pension insurance policies less in demand
The 3rd tier is continuing to display rather restrained development, above all in terms of classic life and pension insurance policies. According to the German Insurance Association (GDV e.V.), the number of new contracts once again declined to below the previous year's already low level (-5.2%). In terms of new business, 50% can be attributed to new guarantee products, following 46% in 2016 and 37% in 2015.
Slight downward trend in the overall market
As described above, the market environment remains difficult and the population is still displaying reservations when it comes to signing long-term contracts. At € 144.7 billion according to provisional figures provided by the German Insurance Association (GDV e.V.), the brokered premium sum of new business in the reporting year is therefore slightly (-2.4%) below the previous year's figure (€ 148.3 billion), which was already low in the long-term perspective.
In the reporting year, the market environment in the wealth management area continued to be characterised by the ongoing period of low interest rates and at times high volatility in stock markets. However, a global economy displaying robust overall growth and profit growth, coupled with low interest rates and a friendly monetary policy, provided good stimulus to global stock markets. In the reporting period, the strategic picture in financial markets was primarily characterised by the political, monetary and economic "regime change". The gradual phasing-out of the ultra-expansionary monetary policy by major central banks, the separatist tendencies observed and the shift to the political right in Europe, as well as the unclear consequences of Brexit all contributed to a sense of uncertainty.
According to the Global Wealth Report 2017 of the Boston Consulting Group (BCG), the financial assets of German citizens increased by 3.7% to a total of USD 6.3 trillion in the 2016 reporting period, while global financial assets totalled USD 166.5 trillion. In terms of the wealthiest countries according to the survey, Germany is in fifth place – behind the US, China, Japan and Great Britain. In terms of the total number of millionaire households, Germany is in sixth place.
Overall, private households in Germany are actually richer than ever before. According to data published by the German Bundesbank, their monetary assets increased to a record level of around € 5,778.6 billion by the end of the third quarter of 2017. The Bundesbank also states that private households are continuing to display a preference for liquid and low-risk forms of investment.
A total of € 138.8 billion net had been invested in the German fund industry by the end of November 2017, which represents a 6.9% increase in the volume of funds under management. The highest percentage gains were recorded by equity funds, which rose by 14.9%, followed by mixed funds, which rose by 13.9%. Fixed income funds recorded an increase of 9.5% in the first eleven months of the reporting year.
According to the Wealth Barometer published by the Deutsche Sparkassen- und Giroverband Financial Group, the majority of German citizens (59%) are satisfied with their financial situation. This is the highest value for ten years. However, half of the respondents are worried about the low interest rate and/or the European Central Bank's monetary policy. Just under two thirds consider a turnaround on interest rates in the near future as important or very important.
Institutional investors focusing on alternative investments
In an environment characterised by low returns and geopolitical risks, institutional investors throughout the world are increasingly turning to alternative forms of investment as a way of diversifying their portfolios. This is the conclusion of the annual RiskMonitor survey undertaken by Allianz Global Investors (AllianzGI). Indeed, seven out of every ten investors surveyed worldwide stated that they have invested in alternatives. According to RiskMonitor, institutional investors focused increasingly on risk management in the reporting period and adjusted their yield expectations down. Despite the fact that stock markets rose sharply in the reporting period, institutional investors are therefore still facing a risk-return problem, as well as the question of whether all risks are factored-in within the markets.
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 wealth management and in private banking in particular. At the same time, the continuing low interest rate environment is also leading to keener price awareness among clients.
Non-life insurance business has become more important for independent brokers in the past few years. According to a survey performed by AssCompact, in 2017 just under three quarters (70%) of brokers surveyed consider the private non-life insurance business to be highly relevant. In two-year comparison (2015) this figure was just 40%.
Non-life insurance as a solid pillar of the business model
Set against the background of the tense and uncertain framework conditions in the life and health insurance areas and as a result of Solvency II taking effect, the very solid overall development of the non-life insurance area is playing a special part for the industry according to rating agency Assekurata. The household contents, accident and liability insurance fields are the main reliable sources of revenue here – particularly in the private client business. In addition to this, Assekurata is observing a more pronounced product-based focus on standardised commercial client business for handicraft businesses or small and medium-sized enterprises (SMEs). Based on the AssCompact AWARD – Commercial Damage / Accident Business 2017 survey, virtually all companies surveyed are currently brokering commercial liability and non-life insurance policies. Commercial insurance policies to cover legal expenses are offered by 87% of brokers, followed by technical insurance policies (74%), vehicle fleet insurance policies (66%), transport insurance policies (55%) and cyber insurance policies (40%). A third of independent brokers are pursuing a sector or target group-based strategy here, focusing on trades, service providers (e.g. estate agents, IT service providers, management consultants), as well as freelancers (e.g. solicitors, doctors, tax advisers).
Ongoing trend to switch vehicle insurance providers
German citizens are now displaying a greater degree of willingness to switch car insurers. According to the results of the most recent study conducted by market research institute YouGov at the end of 2016, a fifth (21.4%) of all motor vehicle insurance policy holders in Germany are generally willing to make the switch. When extrapolated, this corresponds to some 9.4 million motor vehicle policy holders. The trend towards switching providers that was observed in the previous years has therefore continued; in 2010 only 13.1% of respondents indicated a willingness to switch.
Risks due to forces of nature increasing
In 2016 storms and heavy rain caused almost ten times more damage covered by insurance than one year previously. Indeed, claims for flood damage totalling € 940 million were submitted, following just € 100 million in 2015. 2016 therefore saw the third highest level of flood damage since 1999. This is one of the findings from the Natural Hazard Report 2017 produced by the German Insurance Association (GDV e.V.).
The costs associated with flood damage to residential buildings and their contents are only covered by insurance companies when an extended natural hazard insurance policy is in place. As indicated by the German Insurance Association (GDV e.V.), however, many homeowners in Germany do not have this additional module in their building insurance policy. Indeed, only around 40% of residential dwellings throughout Germany have this additional protection. Yet despite this, some 99% of buildings in Germany qualify for insurance coverage to protect against flooding and heavy rain, as they are not classed as being at risk based on the German zoning system (ZÜRS).
Non-life insurance business continues along its positive growth path
Based on estimates of the German Insurance Association (GDV e. V.), growth in the property and casualty insurance area remained stable in the reporting year. For 2017, the GDV is anticipating an increase in premium income of 2.9%. The ongoing strong increase in premiums in the non-life insurance area can essentially be attributed to the regular premium adjustments in both new and existing business, for example in the residential building insurance and legal expenses insurance areas. The growth in all branches of the non-life insurance area is generally based on rising insured amounts, and partially also extensions in coverage, however not on an increasing number of insurable risks.
Ever fewer holders of comprehensive health insurance policies in Germany
Health insurance continued to face a challenging market environment in the financial year 2017 – 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 5 years in succession. At 8.77 million policy holders on December 31, 2016, the figure was 17,300 (-0.2%) below 2015. According to industry experts, this trend also continued in 2017.
Statutory health insurance getting more expensive
Since 2015, statutory health insurances are entitled to charge an additional premium alongside the general premium rate of 14.6%. The average additional premium was 1.1% in 2017. In addition to this, out-of-pocket payments and co-payments for individual healthcare services have long since become standard for those with statutory health insurance. As the 2017, as Continentale’s study shows, 90% of respondents had paid for healthcare services out of their own pocket in the last twelve months – most frequently at the pharmacy (75%) or the dentist (59%). On average, each statutory insurance policy holder paid € 448 during the year for healthcare services in addition to the regular premiums paid into the statutory health insurance system. This represents € 104 or 30% more than in 2012. Older respondents aged 60 or over faced particularly high costs of € 577, followed by high-income earners with costs of € 541. Yet despite this, the number of policy holders making the switch from private health insurance to the statutory health insurance system was still higher in 2016 than the number of those making the opposite switch, i.e. from the statutory health insurance to a private health insurance policy.
In the course of the German parliamentary elections in 2017 and the subsequent exploratory negotiations among the parties, the public discussion regarding the possible introduction of "citizens insurance" led to uncertainty among German citizens. Even after the elections, the SPD, the Green Party and The Left, in particular, are pressing to move away from the dual system with private and statutory health insurance offers. The SPD was unable to assert its position on this topic in the now completed coalition negotiations.
Holders of private insurance satisfied with services and premiums
Irrespective of the discussions around the future of private health insurance, most clients are satisfied, very satisfied or even completely satisfied with their private health policies. These are the results of a survey conducted by rating agency Assekurata Assekuranz, according to which 96% of holders of comprehensive health insurance are satisfied overall with their private health coverage and 71.2% even state they are happy with the premium increases.
Supplementary insurance policies on the rise
The trend towards private healthcare as a way of supplementing the range of cover provided by the statutory health insurance system continued. According to the latest figures published by the Association of Private Health Insurers, the number of supplementary insurance policies increased by 1.3% in 2016 to 25.1 million contracts.
According to the latest available figures from 2016, dental plans are by far the most popular supplementary insurance option, with around 15.5 million policies currently in place. The number of these policies increased by 1.3%. Supplementary long-term care insurance is another growth driver in the supplementary insurance policy area. The number of state-supported supplementary long-term care insurance policies (Pflege-Bahr) increased by 13.7% to around 777,000 contracts in 2016. The number of unsubsidised supplementary long-term care insurance policies rose by 4.5% to just under € 2.7 million.
Nursing care is an important future topic
A representative survey undertaken by the German Centre for Quality of Nursing Care (ZQP) serves to underline the importance of nursing care. According to information provided by respondents in this survey, almost half (43%) of all German citizens rated the life situation of older citizens and those requiring nursing care as very important when reaching their decision as to how to vote in the German parliamentary elections. This figure rose further to 53% in the particularly relevant age group of 50+, representing the largest group of voters.
In the light of persistently 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 2017 Wealth Barometer of the Deutsche Sparkassen- und Giroverband Financial Group, 54% of German citizens consider owner-occupied property to be the most suitable form of investment for this purpose - a rise of nine percentage points compared to 2010, while 27% prefer to invest in investment properties for capital accumulation.
Lowest home ownership level in Europe
In terms of owning their own homes, German citizens bring up the rear when compared to the rest of Europe. While the home ownership level in many European countries such as Norway, Spain and Italy is over 70%, only 45% of residences are owner-occupied in Germany (see chart).
High demand for micro-apartments in major cities
Especially the rents for micro-apartments, such as those used by students, have increased by up to 70% over the past seven years. These are the results of a survey undertaken by the Institute of the German Economy (IW). The survey goes on to state that this can be attributed to the general influx into cities, the low amount of housing on offer and the resultant scramble for living space associated with this.
Loans and mortgages
According to the 2017 Wealth Barometer, three quarters of the German population are generally willing to enter into debt to buy and then live in their own property. This figure increases further to 88% among young families. Based on a survey performed by vdp Research, German citizens finance 78% of the construction costs for their home via the bank and invest the rest from equity.
Competition and regulation
The competitive situation in the German market for financial services did not change significantly for the MLP Group in 2017 compared to the previous year. The sector remains very heterogeneous and is characterised by consolidation trends. The providers include numerous banks, insurance companies and free finance brokers. However, the quality of consulting provided by them can vary quite markedly. In addition to this, the entire sector is facing competitive pressure from the new, innovative market actors (fintechs).
Fintech sector continues to grow – albeit with less momentum
Based on information provided in a survey by comdirect, there are currently 699 fintech startups in Germany. However, the speed at which the sector is growing is slowing significantly. While in 2016 a total of 141 startups were established, only 30 were founded in the first nine months of 2017, as highlighted by the comdirect survey. In comparison, 49 new companies had already been registered by the same time in the previous year. Growth is also slowing in terms of the investment volume, as the percentage increase in 2017 was significantly below the previous year's figure of 40%. Despite this slower growth, the challenge faced by established companies due to the large number of fintechs already in the market remains – although opportunities for cooperation are increasingly opening up.
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 recent years. These continued to impact the market conditions in the past financial year and will continue to drive consolidation.
Focus on greater transparency and better investor protection
The German Bundestag approved implementation of the Markets in Financial Instruments Directive (MiFID II) in March 2017. Large sections of this legislation will come into effect on January 3, 2018 and will adapt national regulations governing financial market supervision to numerous new European stipulations. The planned changes associated with the MiFID II system of rules and standards have fundamental effects on the business models of the sector participants. Existing processes need to be reviewed and adapted to the new requirements, which could prove quite effortful in certain areas. This is particularly true of the IT processes and product structures. In some cases, products will need to be redeveloped and IT processes implemented to comply with the new stipulations. You can find further details on this in the forecast section under Competition and regulation.
Insurance sector busy with IDD implementation
In July 2017 the German Bundesrat formally approved transposition of the Insurance Distribution Directive (IDD) into German law; the legislation is set to be introduced on February 23, 2018. It provides new rules for greater transparency and improved consumer protection in insurance sales (further information on this can be found in the forecast under Competition and regulation). The IDD also stipulates that insurance brokers must attend at least 15 hours of further training per year.
In 2017 the insurance sector and its brokers focused on preparing for the new regulatory requirements associated with the IDD. MLP – just like all other market actors – has to implement extensive process-based adjustments to comply with the IDD stipulations. However, no major effects on MLP's business model are to be expected.
Life Insurance Reform Act (LVRG) showing effects in the market
The Life Insurance Reform Act (LVRG), which already came into force in 2015, also had an impact on the market in the reporting year: according to a survey conducted by cosultancy Willis Towers Watson, the Life Insurance Reform Act (LVRG) led to significantly lower insurance brokerage remuneration in 2017. Indeed, the life insurers operating in Germany reduced their acquisition commission rates by 1.5 to 7.0 permille depending on the sales channel.
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 during the reporting year. As an institution with a banking licence, MLP Banking AG is also affected by this.
In addition to this, on October 27, 2017 the Federal Financial Supervisory Authority (BaFin) published the latest amendment to the minimum requirements of risk management at credit institutions (MaRisk BA). Here, the Federal Financial Supervisory Authority (BaFin) and the German Bundesbank have revised the minimum requirements to comply with new European and international stipulations. In addition to this, experience gained by BaFin and the German Bundesbank in the course of their daily supervisory duties and during audits has been incorporated in the amendment. Important new content affects the areas of data aggregation and risk reporting, risk culture and outsourcing. The new version of Germany's MaRisk minimum risk management requirements came into force with its publication. The implementation deadline for new requirements is October 31, 2018.
Obligation to attend further training also for estate agents
On June 22, 2017 the Bundestag passed the law for introduction of a professional licensing scheme for commercial estate agents and residential property managers. The new law will come into force on August 1, 2018. This will represent the first time that property managers have had to comply with such professional licensing requirements. In addition to the existing licensing authorisation, estate agents must also comply with an obligation to attend further training. You can find further details on this in the forecast section under Competition and regulation.
The transitional period within the scope of the EU Mortgage Credit Directive (WIKR) ended on March 21, 2017. Under § 34i of the German Trade Regulation Act (GewO), consultants without authorisation had time to produce a corresponding certificate of proficiency by this cut-off date. In March 2016 the Mortgage Credit Directive (WIKR) transposed an EU directive into German law. Market actors are anticipating market consolidation as a result of the consultant qualification requirements. Thanks to corresponding internal training measures, MLP consultants are prepared for this.
Initial steps towards a "European pension"
In the summer of 2017, the EU Commission presented its draft of a system of rules for a Pan-European Personal Pension Product – PEPP). As an element of capital market union, the goal is to use PEPP in order to facilitate private old-age provision offers throughout Europe and drive the concept forwards. From the perspective of rating agency Assekurata, the proposed uniform standards within Europe would generally be welcomed in terms of transparency. However, with the current scope of the PEPP, experts are not anticipating any massive growth stimuli, especially for the German insurance sector.
New definition of "need for care" as of 2017
The second part of the Care Enhancement Act (PSG II) came into force on January 1, 2017. In place of the three previous care levels, there are now five degrees of care. To finance this, premiums for care insurance increased by a further 0.2 percentage points from 2017 onwards. However, statutory long-term care insurance only offers partial financial security. Good advisory services on private care coverage are therefore becoming increasingly important.
MLP considers itself to be generally well prepared in terms of compliance with the legal documentation, qualification and transparency obligations. But irrespective of this, the regulatory developments will certainly represent a challenge and put pressure on the profitability of all market actors.
Demand for independent consulting services remains high
According to the latest surveys, independent financial consultants, i.e. providers such as MLP that do not offer any of their own products, continue to play a leading role in the brokerage of old-age provision products in Germany. According to the 2017 Sales Channel Survey performed by corporate consultancy Willis Towers Watson, independent brokers represented the leading sales channel in the industry in terms of life insurance policy sales. Their market share of brokered new business was 28.7% (previous year: 26.3%). Banks came second at 28.6%, while tied agents, who represent just one single company, took third place with 27.2%.
The latest figures from Willis 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 33.9%, they represent the second most important consultant group after the tied agents (48.5%). The same applies to the non-life insurance area. Here, independent brokers also represented the second most important sales channel at 26.1% after the tied agents (45.4%).
Consolidation of brokers ongoing
The number of insurance brokers has been in permanent decline for years. According to current figures provided by the Association of German Chambers of Industry and Commerce (DIHK), the number of brokers on the insurance broker register fell by 4,000 to 224,462 between the start of the year and October 2017. In comparison with 2011, when 263,452 brokers were registered, the decline is around 15%.