Chapter 8 Outline

Consolidation in the European
Insurance Market

Between 1996 and 1998, a wave of mergers swept through the insurance industry in the European Union. The mergers were the results of a process begun on January 1, 1993, when the Single European Act became law among the member states of the European Union. The goal of the Single European Act was to remove barriers to cross-border trade and investment within the confines of the EU, thereby creating a single market instead of a collection of distinct national markets.

Under the act, the EU insurance industry was deregulated and liberalized in mid-1994. Before that, wide variations in competitive conditions, regulations, and prices existed among the different national insurance markets. For example, in early 1994, a simple 10-year life insurance policy in Portugal cost three times more than the same policy in France, while automobile insurance for an experienced driver cost twice as much in Ireland as in Italy and four times as much as in Britain. The new rules did two main things. First, they made genuine cross-border trade possible by allowing insurance companies to sell their products anywhere in the EU on the basis of regulations in their home state, the so-called single license. Second, insurers throughout the EU were allowed to set their own rates for all classes of insurance policy. They no longer needed to submit policy wordings to local officials for approval, thereby dismantling the highly regulated regime behind which much of the industry had sheltered. Among the expected outcomes of these changes were an increase in competition and downward pressure on prices.

By mid-1997, it looked as if the move toward a single market in the EU was going to be given a further push by the impending adoption of a common currency, the euro, among a majority of the EU's member states. The first stage in the adoption of a common currency occurred on January 1, 1999, when 11 of the EU's 15 member states locked in their currency exchange rates against each other and begin handing over responsibility for monetary policy to the newly created European Central Bank. The second stage will occur January 1, 2002, when the currencies of the participating states will be formally abolished and replaced by a common monetary unit, the euro. The coming of the euro will make it much easier for consumers to compare the insurance products offered by companies based in different EU states. This should increase competition and lower prices.

The initial response to these changes in the competitive environment was muted. However, by mid-1996, insurance companies were beginning to realize they needed to reposition themselves to compete more effectively in a single market dominated by a single currency. This realization resulted in a wave of mergers between firms within nations as they tried to attain the scale economies necessary to compete on a larger European playing field. In 1996, Axa and UAP, two French insurance companies, merged to create the largest European insurance company. As part of the deal, Axa gained control over several subsidiary companies that UAP had acquired in Germany in 1994, allowing Axa to increase its presence in this important market. Two large British insurance companies, Royal Insurance and Sun Alliance, also joined forces in 1996.

This was followed in 1997 and early 1998 by a number of cross-border mergers, the most notable of which was between Germany's Allianz and AGF, a large French insurance company. The merger between Allianz and AGF was prompted by a takeover bid for AGF launched by the large Italian insurance company Generali. Generali wanted to acquire AGF to expand its presence in France. The bid spurred Allianz into action. Allianz, which dominates the German insurance market, had been feeling threatened by increased competition in its home market arising in part from a merger between Munich-based Hamburg - Mannheimer and Britain's Victoria Insurance and in part from the increased strength of the Axa - UAP combination. Displaying a sensitivity for French sentiments that Generali lacked, Allianz promised that AGF's management would remain French and that Allianz executives would be in the minority on the board of the merged company. Unwilling to make such concessions, Generali eventually withdrew its counter-bid for AGF, but not before it had won a significant concession from Allianz and AGF. In return for withdrawing its bid, the German and French companies agreed to sell several important subsidiaries to the Italian insurer, boosting Generali's premiums by more than half and giving it a sizable presence in both Germany and Italy.

As a result of these developments, the shape of the EU insurance industry had been substantially altered by mid-1998. Allianz had emerged as the largest pan-European insurer, with $64 billion in total premium income. In addition to its leading position in Germany, Allianz had become one of the top five insurers in Beligum, Spain, and France. The Axa - UAP combination had become the second largest European insurer with significant activities in France and Germany, while Italy's Generali with premium income of $31 billion was now the third largest pan-European insurance company.

http://www.allianz.com

Sources: R. Lapper, "Hard Work to Be Free and Single,"Financial Times, July 1, 1994, p. 19; "A Singular Market. In the European Union: A Survey," The Economist, October 22, 1994, pp. 10 - 16; "Insurance: Can the Empire Strike Back?" The Economist, April 25, 1998, p. 76; and C. Adams, A. Jack and A. Fisher, "Allianz Bid Mirrors its Global Ambitions," Financial Times, November 11, 1997, p. 20.