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European Long-Term Insurance Market Assessment 2006
Key Note Publications Ltd, Oct 2006
The European long-term insurance industry faces two problems: a universal rise in the dependency ratio and government regulations that are overly restrictive. Although these issues are acutely pension-related, they also affect attitudes towards life insurance. People are living longer, but their children are not reproducing at a rate to sustain the current population levels in Europe. Since the present generation pays the pensions of the preceding generation, there is a growing problem of affordability.
Solutions to these problems include raising taxes, raising employer contributions, raising employee contributions, increasing productivity, raising the age of retirement and increasing the role of the private sector.
This report examines the situation for the EU as a whole and focuses on seven countries in particular: Belgium, France, Germany, Italy, the Netherlands, Spain and the UK. Demographic data confirm that all countries are experiencing static or falling population levels, moderated only by migrants, who are internal to the EU. Most of the countries profiled in this report have experienced slow population growth. Economic conditions are recovering from the stock-market falls of 2000 to 2003, when several major providers were severely hit through their investments in equities. Inflation is low, but positive, and is a potential threat.
The density of life insurance penetration differs dramatically between countries, reflecting strong national differences. This may be due to cultural differences, or to government regulations that `crowd out' the private sector. In addition, life insurance premiums have recovered fast in some countries since the dramatic drop in interest in 2000 to 2003, boosted by the introduction of innovative life insurance products. Insurance companies are expected to continue to grow and re-establish their reputations under the stricter regulatory regimes from 2006 to 2010.
Pension provision also differs between countries, where there is a clear negative relationship between the universality and generosity of state schemes on the one hand, and private provision of pensions on the other. If workers believe that the State will provide an adequate pension in retirement, they will not make provisions for themselves.
Governments in most countries are beginning to take measures to ameliorate the crisis. In most cases, these involve lowering the benefit levels, increasing contribution rates and withdrawing incentives for early retirement. In addition, taxation measures are common. In some countries, the introduction of private-sector pension providers has taken place, notably in the Netherlands and Spain. In Germany, however, this transition has proved problematic.
Key Note's analysis of individual firms shows that they are able to take advantage of any easing of restrictions by offering attractive products and increasing their returns. At the same time, they are able to become more efficient as they take advantage of economies of scale.
Overall, the crisis can be solved by a combination of measures, but requires firm governments to overcome lobbying from groups that have gained disproportionately from the current systems of social welfare.
The long-term insurance industry will have a key role in providing transparent, flexible and high-yielding insurance and savings products that are sustainable and provide for a secure old age. The industry is indispensable if workers are to raise their savings to adequate levels.
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