Product innovations in German life insurance
Low interest rates, insufficient capital market returns, new capital requirements, unattainable performance guarantees on existing policies. All products that result in vested entitlements or fulfil a savings function, such as health and life insurance, are under massive pressure: insurers are barely able to earn the returns they need to meet future obligations.
So it’s no surprise that more and more insurers are discontinuing business lines, in classical life insurance for example, and are thinking about new, more flexible products that will get their new business buzzing again. But what to do about existing policy portfolios and guarantees that weigh on the statement of financial position? Some insurers such as ARAG Leben or Basler have opted for run-offs, which means that they have sold their life insurance portfolios.
The most recent example of an insurer doing so is Generali: in summer 2018, the insurer signed an agreement concerning the sale of over four million life insurance contracts with high interest rates and a volume of around 37 billion euros to the run-off specialist Viridium. Viridium took control of the group subsidiary Generali Leben Deutschland with an 89.9 per cent share, with Generali itself retaining a minority interest. Following a thorough investigation, the Federal Financial Supervisory Authority (BaFin) gave the green light for the takeover on 9 April 2019. The sale is currently the largest transaction of its type in Germany.
Numerous other insurers are also starting to consider this option: according to a survey of 100 insurance managers carried out by the French investment company for the 12th annual Handelsblatt insurance industry conference in September 2018, around 30 per cent of life insurers are examining the possibility of winding up their legacy portfolios. According to the study, around 17 per cent are planning internal run-offs – that is, fully discontinuing new business and winding up their existing contracts. Around 13 per cent are considering external run-offs, which involve selling their insurance portfolios to an investor: either the current insurance group sells the entire company or the portfolio is transferred to another insurer in full.
The advantage of run-offs is that by winding up their existing business, insurers generate positive effects for their books and the Solvency II equity requirements are easier to meet.
At first, the disposal has no effect on the insured parties themselves: the buyer of the portfolio assumes all the rights and obligations of the previous insurer and continues the policies correctly and in line with the contract – the supervisory authorities, like BaFin in Germany, make sure the insured are not disadvantaged in any way. This principle also applies to profit sharing, which has to remain stable after a takeover.
Before policies are transferred, the regulators also check the financial situation of the buyer as well as its solvency, reputation and strategy.
Costs are the key argument in favour of run-offs in life insurance. Besides the pressure on legacy portfolios from low interest rates, the costly administration of policies in outdated IT systems is a problem for life insurers. Transferring the portfolios to a new, modern IT platform can make the policies significantly cheaper to manage. According to a study carried out by Boston Consulting for the Dutch market, the cost rate per contract can be lowered from around 44 euros to 16 euros with modern IT.* From the perspective of the operators of run-off platforms, the transfer of portfolios only makes sense if a company can save significant administrative expenses for policy portfolios by means of superior IT, says Frank Grund, head of insurance supervision at BaFin. Run-off operators advertise higher profits because they manage the portfolios more cheaply, cut sales costs and manage capital investments more lucratively – and, in doing so, they are attempting to dispel the mistrust of consumer protection agencies in particular.
Run-off specialists such as Viridium are counting on it: its business model is based on migrating the legacy policies it acquires to a new platform based on modern, standard software, as Viridium director Heinz-Peter Roß explained in an interview with the FAZ in summer 2018. ‘We bundle as many policies as possible into it, allowing us to lower our costs dramatically.’
Everything is dependent on IT capabilities, as underlined by Frank Wittholt, member of the Ergo Lebensversicherung Management Board, at the trade conference ‘Run-off 2019’ held in Hamburg by the Süddeutsche Zeitung on 19 February 2019: ‘IT expertise is the key resource that you have to have.’ Ergo opted for an internal run-off. Its new business is now handled by Ergo Vorsorge LV, whereas its legacy life insurance policies are managed on a newly created IT platform. Ergo needed a new, modern IT system with a high degree of standardisation combined with support for multiple clients. As such, other portfolios can also be managed.
‘The scarcest resource that we talk about is always IT,’ says Heinz-Peter Roß, CEO of the Viridium Group. As such, the planned acquisition of the Generali life insurance portfolio is of particular interest due to the anticipated economies of scale on its platform.
msg life provides exactly what run-off specialists need: a modern, complete IT solution with a high degree of standardisation and automation, years of experience and expertise in migration that is unsurpassed in the market.
Insurers and run-off specialists can rely on msg.Insurance Suite because the standard solution digitally maps all of the core processes of an insurer in full. With its high degree of automation and prefabrication, the end-to-end integrated platform is the key to exceptionally efficient IT and to lowering costs, thus making it a must-have for operators of run-off platforms. As the standard software supports multiple clients, a wide range of insurance portfolios can be managed on a single platform. The resulting economies of scale lower the costs per contract even further.
Self-service options are another way of lowering processing costs and, in turn, increasing profitability. This too is possible with the complete solution msg.Insurance Suite: with the built-in innovative customer self-service portal msg.Online Insure, business processes can be outsourced to end customers and administrative costs can be cut significantly.
Inevitably, the topic of run-offs goes hand in hand with that of migration. Run-off specialists take over masses of policies from legacy systems that have to be migrated to a modern IT platform. Effective standardisation is one of the most significant factors for countering the proliferation of tariffs of the past. This requires a systematic and efficient approach. Once again, msg life possesses unrivalled expertise in the market: over the last 15 years, msg life has completed over 40 migration projects successfully with 45 million migrated policies.
The complete solution msg.Insurance Suite, the self-service portal msg.Online Insure and the unparalleled expertise of msg life in migration provide insurers with the necessary advancements in process efficiency, cost optimisation and productivity for run-offs. Many installations at well-known insurance companies and successful migrations of legacy portfolios provide proof of our solutions’ performance.
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