The insurance business used to be pretty lucrative in Germany, perhaps too lucrative. Companies like Allianz, the country’s biggest insurer and one of the world’s largest too, could always count on handsomely invested returns and the loyalty of security-conscious Germans as a steady source of sales and profit.
But no more. Interest rates are near zero, and there’s little chance of them rising soon. German consumers unimpressed with interest rate-linked insurance policies are turning to other options, such as real estate. They’re also starting to shop around for insurance – and many are finding cheaper alternatives from a host of lower-cost, online competitors.
So it wasn’t exactly unexpected on Tuesday when Oliver Bäte, the chief executive of Allianz, pledged to cut costs, woo new customers, introduce new performance benchmarks and get tougher with subsidiaries that fail to meet new, tougher profit goals.
In the new, more cut-throat German insurance sector, Allianz no longer has time on its side.
“In the past we’ve been very patient with group subsidiaries that were below average, much too patient. We’re going to change that. We need more profit engines.”
“In the past we’ve been very patient with group subsidiaries that were below average, much too patient,” Mr. Bäte told an investors conference in Munich. “We’re going to change that. We need more profit engines.”
Many subsidiaries within the global insurer were contributing too little to the company’s financial bottom line, he said. As a result, Allianz will try to become more modern, more flexible and more attuned to customer interests, instead of its own.
The revamp is needed and overdue. The insurance industry faces an array of challenges such as chronically low interest rates that are making it increasingly difficult for insurers to generate good yields with their customers’ premiums.
Allianz’s U.S. fund manager Pimco is still producing a stream of bad news. Digital start-ups in Silicon Valley, Berlin and Munich are giving traditional insurers like Allianz a run for their money, sensing that consumers no longer have time or patience to buy insurance from a salesman on their sofa.
These new entrants are a serious threat to big insurers because they are more online, and more in tune with consumer habits. Firms such as Allianz have been slow to transform their business online through email or online damage claims filed by smartphone users, with photos.
The newcomers are often quicker and promise better, more modern service.
Mr. Bäte said he is asking Allianz’s 147,000 staff to re-examine whether existing structures and work routines add to customer value.
“We are many things, but we aren’t focused on the customer,” Mr. Bäte said. Allianz is introducing a measure of customer satisfaction, the “Net Promoter Score,” that he said aims to generate five million new customers and €6.5 billion, or $6.9 billion, in additional premium income.
The new scores will be used to determine staff bonuses.
Mr. Bäte, Allianz’s former chief financial officer, pledged to boost earnings per share by 5 percent on average and boost return on equity to 13 percent by 2018. Targets will also be set for individual divisions.
Each life insurance unit must generate a return on equity of 10 percent or more by 2018 — a level so far only achieved by Allianz’s German life unit. Allianz also plans to save €1 billion per year by 2018, which will be invested in technology, staff and growth.
There are no plans for job cuts. Acquisitions are possible, but Mr. Bäte said he would take a “very disciplined” approach to purchases.
Even if Allianz doesn’t exactly plan to re-invent insurance with its reforms, some investors applauded the strategy.
“It’s better to engage in fine-tuning rather than having to everything differently,” Daniela Bergdolt of German investor rights group DWS said. “If you turn everything upside down it just unsettles people.”
As part of Allianz’s new digital drive, Mr. Bäte said the insurer with Chinese search engine operator Baidu and Chinese investor Hillhouse Capital will sell insurance through digital channels in China.
As part of Allianz’s new digital drive, Mr. Bäte said the insurer will enter into a partnership with Chinese search engine operator Baidu and Chinese investor Hillhouse Capital to sell insurance through digital channels in China.
“We’ll completely redefine insurance with this,” Mr. Bäte said.
Allianz had neglected China, and that is about to change, he promised.
Allianz expects the market for digital insurance in China will reach €100 billion by 2020. With its Chinese joint venture, the German insurer has the potential to reach 90 percent of China’s Internet users. Baidu is a search engine giant in China, the country’s answer to Google, and processes 8.2 billion search requests per day.
Some 600 million people use Baidu via their phones.
“Baidu could have gone to anyone in the world but they chose us,” Mr. Bäte said. “That is a very important moment for us and I could tell you a lot more about our plans in China in the coming years — but I don’t want to jump the gun.”
The venture will start on Thursday, when Allianz plans to release more details.
As it goes about its reforms, even in difficult times for the industry, it seemed clear from comments Tuesday that Allianz has goodwill built up among most investors.
Allianz has a “very good record when it comes to achieving what it has set out to do,” said Jeff Taylor of fund manager Invesco. “That’s why we’re confident that the company will reach its goals this time as well.”
Christian Stadler, a professor of management at Warwick Business School in England, said it made sense to refrain from radically changing Allianz’s corporate DNA. Companies that practice “intelligent conservation” tend to be more successful, he told Handelsblatt. “One mustn’t try to completely reinvent a company overnight,” Mr. Stadler said. “At the same time, one has to be open to new things — but in moderation.”
Mr. Stadler warned Mr. Bäte to be careful. “Often a certain corporate culture has grown in companies. If you change too much, the employees won’t go along with it. The company will break apart. One has to tackle some changes slowly, even if one finds that difficult,” he said.
It’s advice that Mr. Bäte appears to have heeded. A fresh wind is blowing at Allianz. But it’s no hurricane.