Industry trend: Insurers are becoming less important – these are the reasons

There's some movement in the European insurance industry, albeit still very cautiously. In Switzerland, insurers Helvetia and Baloise, previously number five and six in the market, are merging. Both are also very active in the German market. Barmenia and Gothaer have just completed their merger here, and Süddeutsche Krankenversicherung and Stuttgarter Lebensversicherung also plan to merge.

Many other companies are negotiating with each other. "Something's happening in the European market," says Johannes Bender, director at the rating agency Standard & Poor's. What's new, according to Bender, is that there's not just talk, but also the ability to report transactions. Movement is urgently needed, especially in Germany. The market is highly fragmented; many companies have outdated data systems and are facing harsh criticism because they often take weeks to pay out after losses.

It's no wonder insurers are declining in importance. Take private pension provision, for example: In 2015, life insurers collected €88 billion in premiums from their customers. In 2024, this figure was only a meager 6.8 percent higher at €94 billion. During the same period, private households increased their savings from €184 billion to €292 billion, a whopping 59 percent. Germans are saving significantly more, but not with life insurance. Demand is also stagnating in property insurance, where customers insure cars, buildings, accident, liability, and industrial risks. In the long term, it is even declining: 20 years ago, premiums in these segments accounted for 2.5 percent of gross domestic product; in 2024, they accounted for just 2.1 percent.

Even industrial corporations have their problems with insurers. Industry is exposed to many risks: raw materials are becoming expensive, markets are collapsing due to tariffs or other reasons, there is a shortage of skilled workers, supply chains are unstable, climate change is a concern, and cyberattacks threaten data infrastructure. Insurers play only a very small role in many of these existential risks. In areas where companies truly need protection, they are noticeably reluctant to provide coverage. This is especially true for cyber insurance, where large companies find it very difficult to purchase the necessary coverage amounts.

Insurers are losing their customers; they are becoming increasingly less important to society. This is largely due to problems they have created themselves. Some of the most important: There are too many providers. Of the 71 insurance companies in Germany that receive more than €50 million in annual premiums, 49 have a market share of less than one percent. But all of them have an IT and legal department, sales managers, and a highly paid board of directors.

Added to this is the power of large sales organizations and broker associations, which in many cases dictate to insurers what kind of policies, with high commissions, they should offer. All of this adds up to escalating costs. The Germans maintain an army of 181,000 insurance brokers. France manages with 64,000, the Netherlands with 7,000. "High costs can indicate that the price-performance ratio of insurance-based investment products is inadequate," states the financial regulator BaFin.

Every year, life insurance companies therefore pay around eight billion euros in commission to brokers, agents, and banks. The companies recoup every cent of this from their customers, resulting in a correspondingly lower return on their private retirement savings. Non-life insurance is also anything but efficient. 25 percent to 35 percent of premiums are spent on administrative and distribution costs. Added to this are the expenses for claims processing, insurance tax, and profit. Less than half of the billions in premiums flow back to customers in the form of claims payments: customers are paying significantly too much.

The IT systems of many companies are in a deplorable state. Julia Wiens, head of insurance supervision at BaFin and herself a former insurance board member, observes "sometimes serious deficiencies" in the IT systems. The supervisory authority is pushing for modernization, and this is compounded by customer pressure. In the age of Amazon and Zalando, customers expect fast service and don't want to wait months for a request to be resolved.

The advance of artificial intelligence in society and the economy is exacerbating the problem. Insurance customers are also using Chat-GPT or Perplexity, which is reducing the information imbalance between insurers and customers. "Very few insurers will manage the technological transformation entirely on their own," believes Stephen Voss, CEO of digital insurer Neodigital.

Forming larger groups, cutting costs, and disempowering sales teams are the most important steps if companies want a future. Some companies will also disappear. The most recent example is the Berlin-based insurer Element, which filed for insolvency. In addition, there is an urgently needed transparency initiative. Insurance contracts must explain in simple terms what is and isn't covered, and what costs will be incurred. In the event of a claim, companies must communicate openly and quickly. Especially in motor insurance, many injured parties currently have to wait weeks for their case to be processed.

"Insurers are often difficult to reach, and customers have no information about the current processing stage of their claim," complains consumer advocate Bianca Boss, board member of the Association of Insureds. "Claims processing should be digital, simple, and transparent." Consumers also want significantly faster settlement, says Boss.

One reason this isn't happening at the moment is the shortage of skilled workers in claims departments. However, this didn't just happen. During the low-claims years of the pandemic, insurance board members didn't hire or train enough specialists. When claims numbers picked up again in 2023, insurers suddenly had hundreds of thousands of unprocessed emails and letters.

The piles of mail have shrunk considerably since then. But the fundamental problem remains: The systems of many insurers are no longer suited to today's digital age. This applies not only to small companies; large providers like Allianz, Ergo, Axa, and Zurich are also struggling with technological change. And they don't have a way forward to combat customer insurance fatigue either.

Allianz is the German company with the highest dividend payout, with shareholders set to receive more than €6 billion for 2024. But this isn't a sign of strength: Allianz has to keep its investors happy with high dividend payouts and share buybacks. Even the market leader lacks a truly new business model for the insurance of the future that would entice customers and investors.