Future industry situation and competitive environment
The above influence of the individual areas of consulting on the operating business segments applies accordingly to the future industry situation and the competitive environment.
In future, private and occupational pension provision are set to play an increasingly important part in Germany in terms of maintaining an acquired standard of living during retirement. In its 2017 Pension Insurance Report, the German government stresses that the continuous decline in the level of the statutory pension can only be compensated through supplementary provision. In the short term, however, the industry will continue to face major challenges due to the low interest rate environment and the ongoing reservations when it comes to signing long-term provision contracts.
German citizens not making adequate provisions
Based on a survey conducted by comdirect, almost half of all Germans (48%) are currently not saving for their old age. One in four claims not to have enough money left over to save for their retirement. At the same time, only around one in ten German citizens have confidence in the statutory system and believe that the future statutory pension will be adequate for their retirement.
Statutory pension continues to decline
According to the latest Pension Insurance Report published by the German government, the standard pension level is already at 48.0%. This figure is predicted to decline to 45.0% by 2030. The official group of estimators expects the pension level to fall further to 41.7% by 2045 and the premium rate to increase to 23.6%.
Gaps in provision to be closed
The results of the latest Provision Atlas Germany by Union Investment indicate that the young generation in particular must take action if it wishes to maintain its standard of living when reaching retirement age. The survey calculates that German citizens currently aged 20 to 65 can expect to receive around € 1,070 per month from the statutory pension when they retire. On average, this corresponds to around 48.0% of their last gross income (replacement rate). While German citizens currently aged 50 to 65 will reach a replacement rate of around 64% on reaching retirement age, those currently aged 20 to 34 will likely have to manage on just 38.6% of their last gross income. To maintain their standard of living, the survey states that they will then require around € 800 extra per month. The gap in provision is even wider among higher earners.
Greater support for basic and Riester pension from 2018
The state supports supplementary old-age provision in Germany. In 2018, the maximum tax-deductible amount in Tier 1 is to increase from € 23,362 to € 23,712 for single persons. At the same time, the percentage of premiums paid that is taken into account by the tax authorities is set to increase from 84.0% to 86.0%. A maximum of € 20,392 can therefore be deducted as special expenses in 2018. These figures are doubled for married couples.
In addition to this, the legislation to strengthen occupational pension provision in Germany (BSRG), which comes into force on January 1, 2018, sets a higher basic allowance of € 175 per year for the Riester pension (previously: € 154).
German citizens need to catch up quickly
A European comparison shows just how far German citizens have to go in order to catch up in terms of private old-age provision. Although they pay an average of € 1,141 per year into life insurance policies, this figure is considerably higher in other European countries such as France (€ 2,043 per capita) and Great Britain (€ 2,789 per capita).
Occupational pension provision holds potential
In 2017 the German government launched an extensive package of measures to achieve greater market penetration with the legislation to strengthen occupational pension provision in Germany. According to the German government, small companies and low earners often have the greatest gaps in provision. Indeed, only 28% of employees at enterprises with fewer than ten employees have a company pension entitlement. In total, 47% of employees with less than € 1,500 earned income per month do not have a company pension or Riester pension policy in place at all.
A survey undertaken by Deloitte also underlines the need to catch up. Based on the information provided, only 26% of employees currently participate in deferred compensation, i.e. take the opportunity to pay their own money into occupational pension schemes. Only 11% of employees receive employer-financed occupational pension provision with which they are satisfied. According to the survey, such problems often arise due to a lack of information. Indeed, 30% of respondents stated that they had not received adequate information on occupational pension provision. A further 35% said that they did not receive any information at all. Those participating in the survey stated that they would ideally like to have a consultation meeting with example calculations for their personal situation or a detailed brochure.
Assekurata takes the view that the legislation to strengthen occupational pension provision in Germany (BSRG) can deliver particular growth stimuli for consulting firms with a strong presence in occupational pension provisions and a pronounced target group focus in the commercial sector.
Unit-linked products enjoying an upswing
Assekurata believes that the ongoing low interest rate environment is forcing more and more providers to turn their back on typical life insurance policies. Biometric products such as occupational disability insurance and unit-linked policies are therefore getting more attention. What's more, growth opportunities for the entire old-age provision sector could result from the ongoing good economic situation of private households in future.
The reservations being displayed by German citizens when it comes to signing long-term contracts is likely to continue in the financial year 2018. However, in light of the legislation to strengthen occupational pension provision in Germany (BSRG) there is still potential particularly in the field of occupational pension provision.
The market environment in the wealth management area is characterised by profit growth in a global economy which is still expanding robustly, low interest rates and a friendly monetary policy. FERI Investment Research expects this scenario to continue providing good support to global stock markets in the interim, although it is likely to be increasingly put under pressure over the course of 2018 due to existing risks. Alongside the fundamental problem of ongoing high debt levels in almost all countries, the risks according to FERI are primarily associated with a significant drop in growth momentum in China and the gradual withdrawal of the expansive monetary policy by the key central banks. The situation is also compounded by the fact that the economic upturn in the US is clearly in its late stage. The different alignment of monetary policy, in particular the difference between the US on one side and both Europe and Japan on the other, could lead to increased volatility in the markets.
The need for high-quality wealth management services is set to increase in the long term, due to the consistent growth in private wealth. In its 2016 Global Wealth Report, the Boston Consulting Group (BCG) expects global high net-worth individuals to increase at an annual rate of 6% and exceed US$ 224 trillion by 2020.
Over the next few years, we expect to see major shifts in funds due to inheritances. According to a survey performed by the German Pension Institute (DIA), private households in Germany alone will inherit around € 3.1 trillion by 2024. Based on the DIA survey, an average of € 363,000 will be handed down per inheritance.
Private investors still cautious regarding shares
According to a survey performed by AXA on the topic of investment behaviour, German investors are remaining rather reserved with regard to the stock markets. Accordingly, only around 14.0% of German citizens hold shares or mutual equity funds, despite the fact that four out of every ten Germans find the idea of investing on the stock exchange "highly interesting". However, more than half of the respondents agree with the statement that they would only invest money on the stock exchange if they had a money-back guarantee for their investment.
Alternative investments still in demand
Among institutional investors, the trend towards alternative investments is ongoing. According to the Mercer European Asset Allocation Survey 2017, classic government bonds with a good rating no longer deliver sufficient profit. Depending on their investment strategy and the regulatory opportunities available, institutional investors are therefore looking more towards shares, real estate, private equity and private debt - and this trend will intensify. Indeed, according to a survey undertaken by the German Private Equity and Venture Capital Association (BVK), more than half of all German institutional investors and family offices (55.0%) are keen to further expand their private equity allocation in the coming one or two years, while another 40.0% are seeking at least to maintain their current level. The BVK expects private equity to become even more popular over the next few years.
In light of low interest rates, the ongoing debt crisis and geopolitical risks, the capital market environment is likely to be characterised by pronounced volatility and remain challenging in the 2018 financial year. Within this context, in the long term we expect to see an increased need for consulting services in the professional wealth management area among all of the Group's target client groups.
Overall, the German Insurance Association (GDV e.V.) anticipates growth in the property and casualty insurance area to remain at the 2017 level in 2018.
Independent brokers, in particular, are also expecting the growth trend observed in the last few years to continue over the next five years. Indeed, 73.0% of insurance brokers taking part in a survey performed by AssCompact believe that the private non-life insurance business will be highly relevant in the coming four years.
Digitalisation and cyber insurance
According to a recent survey by Bain & Company and Google, the digital transformation holds massive potential - particularly for property and casualty insurance policies, which often employ standardised products and procedures. However, leveraging this requires thorough digital transformation throughout the entire value-added chain. Although insurance companies have invested in the expansion of their digital offers, they have primarily focused on sales and innovations in and around the concept of online marketing. For example, companies are increasingly offering or expanding client portals and using new communication tools such as apps. Technical developments in the field of mobility in particular are changing the traditional business models.
Ratings agency Assekurata also believes that cyber insurance is a promising new market segment. Cyber insurance policies are intended to offer companies protection from damage caused by hacker attacks. According to Assekurata many small and medium-sized enterprises are underestimating the risk associated with this.
Online policy sales showing massive growth potential
The market potential for the selling of policies via the internet is large. Indeed, every second German citizen (56.0%) would have no problem taking out an insurance policy entirely online. This tendency is even more pronounced among those who already regularly purchase books, clothing or electronics on the internet. This was the result of the Digital Insurance 2017 survey undertaken by software producer Adcubum. However, the willingness to sign contracts online drops off sharply for increasingly complex insurance products and those with a longer term. As such, while 56.0% of clients could see themselves signing up for basic products online, such as travel cancellation insurance or travel health insurance, this figure drops to just 2.0% for pension insurance policies. This is just some of the information provided in a survey conducted by the Institute for Insurance Business at the Technical University of Cologne.
Commercial non-life insurance business holds potential
Alongside the established private non-life insurance business, many brokers are increasingly expanding their focus to include the commercial arena as a way of building up or securing a solid portfolio. After all, many companies require specialist expertise and qualified consulting services to secure tailor-made insurance solutions that cover their business risks. According to the survey entitled AssCompact AWARD – Commercial Damage / Accident Business 2017, the relevance of the commercial non-life insurance business has increased by 20 percentage points in the past five years. The independent brokers surveyed agree that this growth trend is likely to continue in the next five years. While 64.0% of independent brokers believe that the commercial non-life insurance business is already highly relevant, 70.0% of brokers believe it will be highly relevant in five years.
Further reforms are to be expected in the German healthcare system over the course of the next few years. The call from several parties for the introduction of a "citizens insurance" – despite the fact that the CDU has clearly positioned itself against this – is continuing to spur on the political and media discussion regarding reforms to the healthcare system.
Statutory health insurance funds anticipating drastic premium increases
Due to demographic developments in Germany, the German Institute for Economic Research (DIW) is anticipating an increase in insurance contributions for the statutory health insurance system from their current level of 14.6% to 16.5% by 2020. This would correspond to an increase of 13.0%, whereby the additional premium (which was 1.1% on average in 2017) has not yet been taken into account. Although the Health Ministry has stated that the average additional premium is set to be reduced by 0.1 percentage points in 2018 due to the good current revenue situation of the statutory health insurance funds, according to estimates provided by the Association of Alternative Health Funds it will increase to between 1.8% and 2.0% over the next three years.
Future of comprehensive insurance depends heavily on politics
MLP believes that the willingness of numerous statutory health insurance policy holders to switch to a private policy will be boosted as a result of the increasing additional premiums. This in turn should inject new momentum into the whole market. Ratings agency Assekurata currently sees hope for a possible reversal of trends in the field of private health insurance, following the recent success in significantly reducing portfolio erosion throughout the comprehensive insurance market in comparison with previous years.
According to experts it depends heavily on the world of politics and the recent intensive discussions regarding the introduction of a "citizens insurance" offering holders of private health insurance the right to switch whether this development actually marks a reversal of trends for comprehensive insurance. Based on the survey on consumers' willingness to switch policies, the experts at Assekurata believe that the overwhelming majority of private health insurance policy holders are unlikely to make any use of a potential right to switch in the event of "citizens insurance" being introduced.
Supplementary private health provision necessary
As highlighted by the Continentale Survey 2017, the vast majority of those paying into the statutory system are worried about the future of the healthcare system in Germany. Indeed, 87.0% are worried that good health provision is costing or will in future cost a lot of money on top of the statutory health insurance premiums. Many consider supplementary private provision to be the right solution here. In fact, 81.0% believe that good provision of healthcare will only be possible via private top-up insurance policies.
The latest Healthcare Barometer published by PricewaterhouseCoopers indicates that well over half (58.0%) of statutory insurance policy holders in Germany currently do not have any supplementary insurance in place. Ratings agency Assekurata therefore sees large untapped growth potential for products such as supplementary dental insurance.
Greater support required for those suffering from dementia
The focus is increasingly turning to care services for those suffering from dementia, as highlighted by the DAK Care Report 2017. Accordingly, the majority of German citizens consider the services provided by statutory long-term care insurance to be inadequate. More than 1.7 million people are already living with dementia in Germany alone, and experts are anticipating this figure to increase to 3 million by 2050.
Occupational health insurance still offers great potential
Only 9.0% of companies in Germany are currently offering their employees occupational health insurance. This figure is up slightly from the 7.0% recorded in 2014, as reported in a survey by market research institute Heute und Morgen. Around 40.0% of companies not offering any occupational health insurance could currently envisage introducing such an offer in future, while 8.0% already have concrete plans to do so within the next twelve months.
Set against the background of increasing rents, around 30.0% of young families in Germany are planning a future real estate purchase according to the Wealth Barometer 2017 of the Deutscher Sparkassen- und Giroverband financial group; this figure is still almost one in four (23.0%) in the 20- to 50-year-old age group.
Need for newly built apartments rising further
There has been a significant increase in the numbers of new builds in the German real estate market in the last three years. According to estimates of Germany's Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR), multi-floor residential buildings represent the main projects here. This is a trend that is likely to continue in future, according to the Residential Construction Forecast 2030 published by the BBSR. The survey states that the number of households in Germany is set to increase by 500,000 to 2030 and be almost 1.3% higher in 2030 than in 2015. Based on calculations, an average of 230,000 new apartments per year will be required for the whole of Germany in the forecast period. For the years up to 2020, the survey even anticipates a higher demand of around 272,000 new apartments per year.
Nursing care properties as an investment
Investment in nursing care properties is becoming increasingly important. The need for compact dwellings with nursing care will increase in future as a result of the demographic shift. According to a survey commissioned by Germany's Federal Ministry of Economics, there is likely to be a shortfall of around 160,000 nursing home places by 2030.
Demand for micro-apartments set to rise
Demographic developments in Germany will lead to a significant increase in demand for micro-apartments, thereby also increasing the value of this type of property. According to estimates provided by the German Federal Statistical Office, the trend towards smaller households is set to continue in future. Indeed, the proportion of single-person and two-person households in Germany will rise to 81.0% by 2030. By this time, four out of every five households will comprise only one or two people. The proportion of small households in the city states is particularly high. By 2030, the proportion of single-person households is expected to increase to 54.0% in Bremen, to 55.0% in Hamburg and to 58.0% in Berlin.
Cities are booming
The boom currently being experienced in cities is reinforcing this trend. Based on a survey conducted by the Institute of the German Economy (IW), the population of Berlin is likely to increase by 14.5% to over 4 million people by 2035. Frankfurt is expected to increase by 11.0% to 813,000 residents, while the population of Munich is likely to increase by 14.4% to 1.66 million people.
On this basis, the real estate market in Germany can expect to see further growth.
Loans and mortgages
In light of the favourable economic environment, German banks should also be able to benefit from the lending business, which is set to pick up in the next few months. Growth in terms of loans both to companies and private individuals is likely to remain higher than in the eurozone overall.
Despite the ongoing normalisation of monetary policy in the US, we should not expect any fundamental improvement in terms of interest surplus at banks in the short term. At the same time, however, the low interest rates and robust economic growth should have a positive impact on bank lending to both households and companies, while continuing to ensure low credit losses. The highest uncertainties for the sector result from the Brexit negotiations between the EU and Great Britain, as well as the speed and extent of the expected turnaround in monetary policy by the ECB. An abrupt interest rate rise could place a significant strain on banks.
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. In addition to this, the entire sector is facing competitive pressure from the new, innovative market actors (fintechs).
Life Insurance Reform Act (LVRG) on the test bench
In 2018 the Federal Financial Supervisory Authority (BaFin) will report to the Bundestag on their review of the Life Insurance Reform Act (LVRG), which came into force in 2015. Initial comments from the supervisory authorities would seem to indicate that they do not consider the reduction in acquisition costs implemented in the sector as adequate. Insofar as the Federal Financial Supervisory Authority (BaFin) maintains its position, ratings agency Assekurata anticipates a readjustment by the legislator.
Legislation set to strengthen occupational pension provision
The German government is keen to offer greater incentives for occupational pension with its legislation to strengthen occupational pension provision in Germany (BSRG). At the heart of the new law is the opportunity to introduce occupational pension provision at companies through a collective bargaining agreement. The new legislation will come into force on January 1, 2018, but will initially only apply to newly concluded deferred compensation. For agreements already in place, the employer's contribution is only set to be compulsory after a transitional period of four years, i.e. from the start of 2022.
Further key points of the new legislation focus, in particular, on a higher tax subsidy to 8.0% (currently 4.0%) 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.
Greater transparency and better investor protection in focus
On January 3, 2018 large sections of the MiFID II Directive will have come into force to bring national regulations in the field of financial market supervision into line with numerous new European stipulations. The amendments have fundamental effects on the business model of securities service enterprises. Existing consulting processes need to be reviewed and adapted to the new requirements, which could prove quite costly in certain areas. This is particularly true of the IT processes and also the product structures.
Record keeping requirements adding extra burden to the sector
Banks and savings banks believe that the obligation to keep records of telephone conversations for securities advisory services to be the greatest burden that the sector faces with the introduction of MiFID II. Indeed, 39 of 50 institutes responding to a survey performed by consulting firm PPI believe that telephone recordings and other consultation records will lead to "extremely high" or "fairly high" costs. The banking association is concerned about the mutual trust between consultants and clients, while independent asset managers are criticising the acquisition costs for appropriate telephone systems.
The banking association is forecasting total one-off costs of around € 1 billion for the implementation of MiFID II requirements. Added to this are ongoing costs for dispatching reports and information to clients.
MiFID II will also result in significant costs for MLP. However, we are well-prepared to implement these requirements.
Key information documents for investment products to follow later
The new EU regulation on packaged retail and insurance-based investment products (PRIIP Regulation) came into effect on January 1, 2018. This regulation stipulates that companies must inform their clients of insurance investment products in a key information document (KID). The objective here is to help consumers gain a better understanding of the opportunities and risks associated with these products. These uniform key information documents should also make it easier to compare various investment products. The content and design of the KIDs are fixed. A maximum of three A4 pages may be used to inform consumers of the most important features of the respective product, in particular its investment objective, risk/return profile and costs. The PRIIP Regulation applies to all investment products and contracts in which the client's money is only invested indirectly in the capital market instead of directly or whose repayment claim is linked to the performance of certain securities or reference values in a different way. This, for example includes investment funds or endowment life insurance policies.
New Insurance Distribution Directive (IDD) comes into force
A far-reaching new regulatory reform for insurance sales is set to come into force from February 23, 2018 with implementation of the EU Insurance Distribution Directive (IDD). The key items of this EU Directive include information requirements and rules of conduct, as well as regulations regarding ongoing qualification of consultants and remuneration. The commission ruling initially contained in the German government's draft bill has been amended in the final legal wording so that fee-based consulting or a mixed model is now also possible. Brokers for private clients can therefore still work on a fee basis, which ratings agency Assekurata believes will continue to safeguard independent advice in the interests of the client. The IDD also stipulates that insurance brokers must attend at least 15 hours of further training per year.
No major effects on MLP's business model should currently be anticipated as a result of the IDD stipulations. However, comprehensive process-based adjustments will be necessary.
Obligation to attend further training for estate agents
The new law for introduction of a professional licensing ruling for commercial estate agents and residential property managers comes into force from 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. In future, property managers and brokers must be able to prove that they have attended 20 hours of further training within the last three years. Residential property managers that are already active have until March 1, 2019 to apply for their permit. They must provide evidence of their further training for the first time in August 2021.
The Investment Tax Reform Act (InvStRefG) came into force on January 1, 2018. Alongside the provisions under European law on equal treatment of domestic and foreign investment funds, its objective is primarily to simplify the taxation of mutual funds at investor level. From January 2018, investment funds must themselves then also pay corporation tax on certain income.
The new EU General Data Protection Regulation (GDPR) will be transposed into directly applicable legislation in all member states of the European Union on May 25, 2018. The objective is to establish an equivalent level of protection of individuals' rights and freedoms with regard to the processing of personal data across all member states.
This will also lead to a wide range of new requirements for MLP in terms of reporting processes, statements of accounts, information disclosure requirements and process documentation.
Well-equipped to handle new regulatory requirements
MLP has already implemented numerous requirements that will become binding law in future. Implementation expertise is required in order to comply with the legal documentation, qualification and transparency obligations. MLP believes it is well prepared for this. But irrespective of this, the regulatory developments will certainly represent a challenge overall and lead to additional implementation costs.