January 2011

Globalization of insurance markets:

Present situation and trends in the German market
Summary

The process of globalization the increasing economic integration of national states is

one of the major trends which the insurance industry is facing worldwide. Whereas
some lines of business such as maritime insurance or reinsurance with its worldwide risk
sharing have always had an international character, cross-border relations with respect
to many other lines of business have increased significantly over the last two decades.
Increasingly, insurance cover for households or companies is granted beyond national borders. Moreover, many insurers offer their products in foreign insurance markets or have become part of a multinational insurance group. However, at the same time, most of the markets for primary insurance have remained national markets. Country-specific factors characterizing these markets include differences in customer demand for insurance and different
designs of products.
In a study published in 2010, the German Insurance Association (GDV) provided a detailed analysis of the contrast between increasing internationalization of primary insurance
on the one hand and the continuing key importance of national particularities in most insurance markets on the other hand, using the example of the German insurance market and
of foreign activities of German insurers.1 The study shows that cross-border relations in
the area of primary insurance have strongly increased over the last two decades. This becomes apparent, above all, from growing cross-border business via subsidiaries, the expansion of multinational insurance groups and the increasing international division of labour
within these groups. By contrast, direct cross-border provision of insurance cover through
branches or within Europe by way of freedom to provide services has only played a minor role so far. Due to important natural barriers to full integration of insurance markets such
as language or cultural and social particularities the majority of primary insurance markets,
even within the European Economic Area (EEA), will probably retain their national character
1

A. Theis, M. Wolgast, Globalisierung der Erstversicherungsmrkte: Stand und Entwicklungstendenzen am deutschen Markt, GDV Volkswirtschaftliche Themen und Analysen Nr. 6, 30 pp, Berlin,
October 2010. Printed copies can be obtained free of charge from the GDV (economics@gdv.de). In
addition, the study is available on the Internet pages of the GDV (www.gdv.de) for free download.

for the foreseeable future, and cross-border supply of insurance services will presumably
continue to take place mainly in the form of subsidiaries or within insurance groups. However, in order to facilitate European and worldwide integration in primary insurance, consistent further development of the regulatory framework for cross-border activities in the primary insurance market is of particular importance. A further opening-up of national markets
to foreign providers and appropriate adjustments to the legal environment in Europe as well
as on a global scale could make an important contribution to removing still existing legal
obstacles to integration, thus strengthening the efficiency and effectiveness of the private
insurance industry worldwide.
Driving forces and motives for foreign activities of primary insurers
After World War II, the increasing integration of the global economy was initially mainly
based on trade in industrial goods, and it was not before the 1970s that internationalization
became a major trend in the financial sector as well. The reduction of legal barriers to
cross-border activities of financial services companies, the opening-up of new markets to foreign providers (e.g. Eastern Europe, China, India) and a deregulation of many
national markets played a key role in this context. For the European insurance industry, the
creation of the European Single Market for insurance in 1994, in particular, was an important milestone. Since then, due to the introduction of a single passport, it has been possible for insurers in the European Economic Area to set up branches in other EEA countries
or to offer insurance cover within the EEA across borders directly from their home country
by way of freedom to provide services with the authorization granted by their home countrys
supervisory authority only. Moreover, in Germany and in many other European countries,
the creation of the European Single Market was combined with an extensive deregulation of
insurance markets, which has improved market opportunities for foreign insurers as well.
Other important driving forces of financial globalization are the revolutionary changes in
the area of information and communication technology, which have created completely
new possibilities of transaction via the worldwide data and communication networks.
Insurance companies have quite different motives for extending their foreign activities.
For a long time, the increasing need of domestic customers for insurance cover for
foreign risks has been an important driver. For instance, insurers frequently accompany
their industrial and commercial customers to foreign markets. Another motive for engaging
in business abroad lies in the specific know-how many insurers have acquired from their
home market in specific lines of business, for instance, because insurance products are
particularly highly developed there, which they then want to use in other countries as a
competitive advantage. More generally, by offering products in several countries, undertakings may benefit from economies of scale und scope, e.g. with regard to the development
of new product variants or within the scope of risk management or company organization,
and risk diversification becomes possible with regard to both business volume and profits.
Also, given the modest scope for growth in insurance markets of industrialized countries
with high rates of insurance penetration, an increasingly important motive for insurers of
industrialized countries to engage in foreign activities is their wish to participate in insurance markets with higher growth prospects, particularly in emerging markets (e.g. Eastern Europe, Latin America, China, and India).

Emergence of multinational insurance groups as the main avenue of globalization

Up to now, in contrast to industrial goods, cross-border trade plays only a minor role in
the field of insurance as well as retail financial services as a whole; the share of financial
services in global trade volume only amounts to approx. 2 % (2007). Reasons for this are
that in many cases the provision of financial and insurance services requires physical proximity of providers to their customers, particularly with respect to private households, or the
specific national character and extensive (national) regulation of many insurance markets.
Accordingly, internationalization in insurance takes place mainly through cross-border
direct investments into local subsidiaries in foreign markets. In 2008, direct investments of financial services providers accounted for almost 20 % of global cross-border direct investments. Of particular importance for insurance companies wishing to diversify into
other national markets are acquisitions of existing local companies which are in command of
extensive local know-how and which have access to established distribution channels within
these markets. With regard to cross-border mergers and acquisitions, over the last few
years, acquisitions by financial services companies accounted for about half of the volume
of transactions. Accordingly, in primary insurance, growing internationalization becomes
apparent, in the first instance, in the emergence of multinational insurance groups with subsidiaries in several countries. The possibilities of offering insurance cover in foreign markets
through branches or by way of freedom to provide services are used to a much lesser
extent only.
Barriers and limits to cross-border market integration
Over the last few years, there has been a marked increase in cross-border activities in
primary insurance and a growing influence of foreign competitors in national markets. The creation of the European Single Market and the ensuing deregulation have led,
inter alia, to numerous cross-border mergers and acquisitions and to the formation of European groups in primary insurance, thus contributing to a considerable extent to the extensive structural changes in European insurance markets, which have resulted in substantial
improvements for policyholders. In many emerging markets, the extensive transfer of capital
and know-how in the course of increasing activities of insurers of industrialized countries
provides an important contribution to the development of efficient insurance markets. However, so far, even within the European Union, full integration of national primary insurance markets, if achieved at all, is still the exception, such as in individual business lines
like industrial business. Attempts to launch pan-European product and distribution strategies
by some insurance groups have not yet had a great impact on the markets. Beyond the
European Union, insurance markets are even less integrated. In sum, most primary insurance markets continue to be predominantly national markets.
One reason is that there still exist some barriers to integration. The legal and regulatory
framework, tax rules as well as the structure of public social protection systems play
an essential role for the supply of and demand for private insurance cover. Even within the
European Union and even more so at international level, these areas continue to be mainly
regulated at national level. Consequently, there are implicit barriers to market entry for foreign providers in most primary insurance markets. Moreover, despite all the progress made
in terms of liberalization over the last few years, direct barriers to entry for foreign financial
services providers persist in many countries worldwide. There are also manifold natural
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barriers to a complete integration of primary insurance markets. First of all, national particularities with regard to culture, language, society, mentality, but also with regard to the risk
situation (e.g. mortality, road safety) continue to have a significant impact, for instance, on
the attitude of the public towards risk and preferences with regard to a protection against
risks, as well as on actuarial calculations of insurers. Furthermore, from the point of view of
an individual insurer, activities abroad will always involve special risks and additional costs.
Thus, for many primary insurers, it may still by all means be a viable strategy to focus on the
home market rather than to engage in foreign business.
Importance of adequate regulatory framework
Even complete removal of the existing legal or regulatory barriers to an enhanced integration of insurance markets combined with complete harmonization of tax policy or social policy would not result in full integration of primary insurance markets in Europe, let alone on a
global scale in the foreseeable future. However, progress in the field of insurance regulation
in Europe could still contribute to the integration of markets. In Europe, an important step
towards the harmonization of insurance supervision has already been made with Solvency II. What is crucial now is an adequate design of the new supervisory framework
and an appropriate further development of the regulatory framework for cross-border
activities. In addition, on a global level, continued efforts to facilitate market access for
foreign insurance providers, supported by further development of global cooperation in
the area of insurance supervision, is of great importance.
Evidence: Foreign insurance companies in the German market
With premiums totalling euro 171 billion (2009), the German insurance market, the fifth largest market worldwide, is one of the most important targets for foreign insurers. Foreign insurers have operated in Germany for many decades. Still, over the last two decades, their
share in the German market has markedly increased. In 2008, about one quarter of premium income in German primary insurance was collected by foreign insurance companies, as compared to only 12 percent back in 1984. The major part of premium income
of foreign insurers (approx. 80 %) is earned through German subsidiaries of foreign insurance groups. According to data collected by the Federal Financial Supervisory Authority
(BaFin), they had an overall market share of about 21 % (life: 27 %, health: 13 %, property &
casualty: 17 %) in 2008. With AXA, Generali and Zurich, three foreign insurance groups out
of the group of the ten largest European insurers are among the ten largest insurers in Germany as well. Increasing activities of foreign companies in the German insurance market
become also apparent from the growing foreign direct investments into German insurance
companies, the portfolio of which has more than doubled over the last 10 years and now
amounts to euro 16 billion. The importance of foreign insurance groups in the German market is also reflected in the composition of the newly established European Colleges of Supervisors, through which national supervisory authorities coordinate their supervisory activities with regard to European insurance groups operating across borders. Within this framework, BaFin participates in Colleges of Supervisors for 17 European primary insurance
groups with head offices in other European countries meaning that those have significant
business activities in the German market.

In contrast to the important role of German subsidiaries of foreign insurers, the business
volume of EEA insurers through German branches or by way of freedom to provide services is still of minor importance in the German market, even though it has markedly increased over the last few years. According to the latest available data (2007), the market
share of companies from other countries operating in Germany through branches or by way
of freedom to provide services has reached 5 percent of the market, whereas it accounted
for less than one percent only back in 1998. Business by way of freedom to provide services in life insurance is most important in this context. In many cases life insurers make
use of the opportunity to offer life insurance products from other European countries, which
would not be legally possible for insurers subject to German insurance supervision.
Even if these figures seem to provide evidence to the contrary, the German insurance market can by no means be considered easy for foreign providers. Entrants into the German
insurance market face a mature market with only very moderate growth rates, characterized by intense competition and a strict and complex legal and tax system, which, moreover,
is subject to frequent changes. The experience gathered in recent years shows that foreign
insurers sometimes seem to have overestimated the opportunities for market entry in the
German market. Compared to primary insurance markets in other countries the market
share of foreign providers does not seem particularly high.
Evidence: German insurance companies abroad
While foreign insurance undertakings have entered the German market, many German insurers have expanded abroad. Not only do German insurers traditionally rank among the
global market leaders in reinsurance, they have also achieved an important market position
in primary insurance. Insurance groups headquartered in Germany are among the large
participants in primary insurance markets in many European countries and all over
the world. Today, the three largest German primary insurance groups earn a considerable
part of their turnover abroad (Allianz almost 70 %, ERGO 27 % and Talanx 30 % of premium
income in 2009). Many other German primary insurers, including numerous small and medium-sized companies, operate successfully in foreign markets as well. Important motives of
German insurers for their foreign activities are, for example, to make use of their specific
expertise with respect to insurance lines which are particularly highly developed in Germany, e.g. health insurance, engineering insurance or legal expenses insurance, or to participate in the higher growth opportunities of emerging markets, such as in Eastern Europe
or Asia. However, in general, the strategic approaches of German insurers with respect
to their international activities vary significantly. There are globally operating groups but
there are also undertakings which completely refrain from foreign activities in view of the
risks and the complexity involved. Many German insurers also focus their foreign activities
on certain regions (such as certain European neighbouring countries) or individual lines of
business (e.g. legal expenses insurance).
Like foreign insurers in the German market, German insurers also predominantly rely on
foreign subsidiaries with respect to their foreign business. In many cases similarly to
a market entry of foreign insurers in Germany local insurers were acquired to gain access
to local know-how as well as customer relationships and distribution channels. The increase
in the foreign activities of German insurers is reflected in the growing portfolio of direct investments of German companies into foreign insurance companies, which amounted to euro
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43 billion in 2008. The importance of subsidiaries of German insurers in other European

countries also becomes apparent from the fact that meanwhile there are European Colleges
of Supervisors for 16 German insurance groups under the aegis of BaFin.
By contrast, the opportunities offered by the European Single Market to provide insurance
cover in other EEA countries through branches or directly from Germany by way of freedom to provide services are used to an even lesser extent by German insurers operating abroad than by other European insurers operating in Germany. According to the latest
available data (2008), companies under German supervision earned premiums in the
amount of euro 1.5 billion in the EEA via branches or by way of freedom to provide services;
in non-life insurance this corresponded to only just over one percent of the total premiums
earned by insurers subject to German supervision, in life insurance to less than half a percent.

Growth of worldwide trade in services*

4,000
other services (including financial services)

3,500

travel

billions USD

3,000

transportation

2,500
2,000
1,500
1,000
500
0
1980

1984

1988

1992

1996

2000

2004

2008

*measured by exports
Source: WTO

Worldwide trade in insurance services*

80
70

billions USD

60
50
40
30
20
10
0
1985

1987 1989

1991

1993

1995 1997

1999

2001

2003 2005

2007

*measured by exports
Source: WTO, own calculations

Volume of cross-border mergers and acquisitions

1,200
companies from other
sectors as acquirer

1,000

financial services
companies as acquirer

billions USD

800
600
400
200

Source: UNCTAD

Market share of subsidiaries of foreign insurance companies in the German

market*
25
20

total
life
non-life

in %

15
10
5
0

1998

2007

*share of premium income of insurance companies under German

supervision and of German branches of EEA insurance companies
Source: OECD

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

Foreign direct investment in German insurance companies*

18
16

billions Euro

14
12
10
8
6
4
2
2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

*Stock at year-end, including reinsurance companies

Source: Deutsche Bundesbank

Foreign insurance groups under European supervision with German subsidiaries*

Chartis / AIG
Aviva
AXA
Berkshire Hathaway
Coface
Fortis
Generali

Halifax
Helvetia
IMA
Bloise
Nationale Suisse
Royal Bank of Scotland
Scor

Skandia
Swisslife
Swiss Re
Uniqa
Vienna Insurance Group
Zurich Financial Services

*supervised by European College of Supervisors with BaFin participation

Source: CEIOPS

Market share of branches of non-EEA insurance companies in the German

market*
3
property & casualty

2.5

life

in %

2
1.5
1
0.5

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

* share of premium income of insurance companies under German

supervision; branches of non-EEA insurance companies do not exist in
health insurance
Source: BaFin

Market share of branches of EEA insurance companies in the German market*

2.5
life

in %

2.0

non-life

1.5
1.0
0.5

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

0.0

* share of total premium income of domestic and foreign insurance

companies in the German market
Source: BaFin

10

Market share of EEA insurance companies in the German market by way of

freedom of services*
6
life

non-life
in %

4
3
2
1

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

*share of premium income of domestic and foreign insurance companies in

the German market
Source: BaFin

Direct investment by German companies in foreign insurance companies*

45
40

billions Euro

35
30
25
20
15
10
5
2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

* stock at year-end, including reinsurance companies

Source: Deutsche Bundesbank

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German insurance groups under European supervision*

ADAC
Allianz
ARAG
Concordia Gruppe
Continentale Krankenversicherung
DEVK

HDI
Inter Krankenversicherung
Mnchener Rckversicherungs-Gesellschaft
Nrnberger

Rheinland Gruppe
R+V
Signal
VHV
Wertgarantie
Wstenrot und Wrttembergische AG

*insurance groups with subsidiaries in at least one other European country, supervised by
European College of Supervisors, BaFin acting as lead supervisor
Source: CEIOPS

Premium income of branches of German insurance companies in other EEA

countries
life

1,200

non-life

millions Euro

1,000
800
600
400
200
0
2001

2002

2003

2004

2005

2006

2007

2008

Source: BaFin

12

Premium income of German insurance companies in other EEA countries by

way of freedom of services
350
life

300

non-life

millions Euro

250
200
150
100
50
0
2001

2002

2003

2004

2005

2006

2007

2008

Source: BaFin

Share of business of branches and by way of freedom of services in the EEA

in total premium income of the insurance companies under German supervision*
1.8

life

1.6

non-life

1.4

in %

1.2
1.0
0.8
0.6
0.4
0.2
0.0
2001

2002

2003

2004

2005

2006

2007

2008

* as percentage of total direct business in Germany and abroad

Source: BaFin

13

Share of foreign business in premium income of the insurance companies under German supervision*
3.0

life
property & casualty

2.5

in %

2.0
1.5
1.0
0.5
0.0
2001

2002

2003

2004

2005

2006

2007

2008

* as percentage of the total direct business in Germany and abroad

Source: BaFin

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