With price competition still relatively new to the German industry, a small group of insurers have taken the initiative and carved out a respectable share of the market

Although the German life insurance market has only been exposed to competitive pressures for a few years, a small group of companies are already pushing ahead of the pack in terms of financial strength and market penetration. The front-runners include Allianz, the market leader with 13%, Victoria and Hamburg Mannheimer, both part of the Ergo group (9%), Deutsche Herold, the insurance flagship of Deutsche Bank, and Bayerische Versicherung, the largest public law entity. These companies are also among the most strongly capitalised in Europe, according to figures from Standard & Poor's.

German insurance regulation was very heavy until around 1992 and there was little fee competition," explains Richard Burden, pan-European insurance analyst at Fox Pitt Kelton. "The only differential was to have a stronger presence on the ground. So the bigger companies very much dominated the scene and this has been difficult to challenge ever since."

Germany's slow-growing market, along with the challenges of the euro and the Y2K IT inconvenience are not helping.

One exception to this rule has been niche player MLP, which has allied its role as part insurance broker/company with a strong graduate client base in the professions to generate good growth and prove a popular investor stock at the moment.

The recent election victory of Gerhard Schroder's SPD, it is suggested, could also result in additional burdens for German life insurers. A bill supported by the German consumers' association, Bund der Versicherten, calling for the complete separation of shareholders' capital and policyholders' funds, the participation of policyholders in hidden reserves and tighter legislation on insurance selling, was recently put before the former CDU government. The SPD may be more sympathetic to this proposal and may also reopen the question of taxation on life policies.

Burden believes there are slight valid concerns here, but says the talk so far has been on a positive note: "There has been a suggestion that income tax may be reduced, for example, which would have a positive knock-on effect for greater disposable income and additional savings to be made by Germans."

A further issue troubling the industry is the ruling by a Nuremberg court that two insurace agents of Hamburg-Mannheimer should enjoy 'employee' status as opposed to being considered self-employed. This obliges Hamburg-Mannheimer to pay at least the past four years' social security contributions on top of holiday and sick pay costs for the two employees. An extension of this ruling to the entire insurance industry could cost in the region of DM100m ($55.5bn).

Another leading analyst adds that the demographic dilemma is particularly prevalent in Germany because of the current high levels of social security provision. "There is no way the German government can continue to maintain the current funding system. Indeed, there are statistics showing that by the year 2030, one in two Germans will be retired, and the workforce will just not be able to support this pensions liability," he says.

As in France, the trend is developing for the larger groups to swallow up their smaller counterparts, with Deutsche Herold being linked to Gerling, Nurnberger and Wurttembergische, in all three of which Deutsche Bank already has minority shareholdings.

Similarly, the big trans-European players are gradually moving into Germany, with Italian group Generali acquiring the AMB group from Allianz-owned AGF in France to add to its existing insurers Deutsche Lloyd Lebens and Generali Munchener Leben, and increasing its market share to 8%.

France's AXA-UAP controls 16th and 19th ranked companies Nordstern Leben and Colonia Leben, which are being merged to form AXA Colonia Leben, and a number of smaller groups.

Other German life insurers are seeking to reduce costs, either through an increasing number of mergers - such as the Gothaer/Berliner-Kolnische umbrella operation - or by carving out niche positions along the lines of the Iduna-Nova speciality of insuring craftsmen and their guilds. Such moves are likely to increase significantly in the future as the need to remain competitive intensifies.

Bancassurance is also enlarging its foothold in the market. Deutsche Herold Lebens more than doubling its premium volume from 1991-95 via bancassurance, according to Standard & Poor's figures.

A further significant development in the determination by German insurers to reduce costs can be seen in Allianz's plans to establish its own asset management company to manage group investments more efficiently.

Similarly, Ergo has been putting out feelers on the investment management front, as well as leading the way on unit-linked trusts, the S&P report says.

UK companies are also trying to muscle in on the unit-linked action, but the strength of German companies and the domestic preference of German buyers, it is felt, will keep the market for the home players.

Perhaps the overriding question being asked by the German insurance industry is if and when the country will step on the demutualisation bandwagon rolling its way around Europe.

With equity investment no longer considered a bête noire by the German public, and concerns at a record high about the state's ability to meet pension requirements - there appears little surprise at the growing argument in its favour.

One thing is sure, say analysts, the German insurance market is being seen through 'hungry'potential growth eyes by investors. Hugh Wheelan"