'Conservative' German insurance market ready for disruption

“We are looking at a most conservative industry in a most conservative country,” said Tomasz Smaczny, ERGO International board member responsible for information technology, at a Nov. 7 Marketforce conference in London.

The digital insurance market is undeveloped in Germany, Smaczny noted.

“Germany is predominantly what I call, in a digital world, an offline market,” he said.

This assessment may surprise some as Germany is famous for developing high technology and fancy products such as premium cars or innovative home appliances.

But the services industry does, for some reason lag behind other jurisdictions, Smaczny said. It often remains paper-based, in German language, and requires a person to be physically in Germany to be processed.

“The services industry in Germany has not yet moved to where it could be,” Smaczny said.

The insurance market in Germany is perceived as very traditional, depending on agents and brokers. The sales processes are organised in a business-to-business-to-consumer (B2B2C) set up instead of business-to-consumer (B2C), Smaczny explained.

But this may raise the question if it has to change at all as it may work well for the big players and consumers.

“The downside of this comfortable situation is that something will have to happen because the market is saturated,” Smaczny said.

Total gross insurance premium in the primary market in Germany grew slightly to an estimated €194.31 billion in 2016 from €193.90 billion in 2015, according to data by the German insurance association GDV.

“Somebody needs to come to the market, probably one of the large players, not a startup, and do something completely different, which I am not seeing yet,” Smaczny said, noting that he won’t comment on what ERGO is doing right now.

ERGO, was formed in 1997 through the merger of D.A.S., DKV, Hamburg-Mannheimer and Victoria and has since been Munich Re’s primary insurance business segment.

After having been loss-making for many years, ERGO is investing in digitalisation and aiming to strengthen its international organisation structures.

As part of the reorganisation, ERGO is setting up ERGO Direkt in Nuremberg, as an ‘Online Competence Centre’, a requirement for offering customers access to ERGO products online and offline. Around 550,000 users are currently registered in the customer portals, representing an increase of 56 percent compared with the numbers in 2015.

ERGO’s subsidiary Nexible has also recently introduced an online only motor insurance product.

But there are other potential disruptors targeting the German market such as HUK24, an online only portal owned by a large brick and mortar corporation. HUK 24 was founded in the year 2000 as an online subsidiary of the German insurance group HUK-COBURG. It does currently serve more than 1,8 million clients and offers a wide range of personal insurance products. The internet penetration of the insurance market in Germany is increasing, albeit at a relatively slow pace.

“Many disruptors are coming to the market,” Smaczny said. “On the other side, we have large insurance companies like us in primary insurance with a completely different way of looking at things, of how to approach the market,” he explained.

“The German market offers a lot of opportunities. It hasn’t moved fast enough,” Smaczny said.

Traditional insurers in the primary market such as ERGO need to look at the whole value chain from a consumer perspective, Smaczny suggested. While in the past insurers only reacted to consumer behaviour by insuring the car that was purchased or paying the doctor’s bills in health insurance, they can now become increasingly proactive. Insurers nowadays can, through data analytics, predict the needs of consumers before they do realize it themselves, Smaczny suggested. And, insurers can influence consumers’ behaviour through incentives, lower prices or vouchers, Smaczny noted.

Furthermore, insurance is currently a “push-driven industry”, particularly in a conservative insurance market like Germany. “You use agents because it is a difficult product to sell,” Smaczny said.

But this may well change in the future. If insurers get a better understanding of the clients’ needs and develop products that match those needs, sales will come naturally, Smaczny suggested.

And, while the process to align the value chain to customer needs may require some investments, Smaczny believes that these investments will pay off.

The business will be profitable because consumers are not always price sensitive. They might not be if the product is attractive, if the insurance is bundled with other products and services and if the product is transparent and easy to understand, Smaczny suggested.