Ventajas e inconvenientes

Prospects

The insurance industry in Europe and Germany

As a result of the very different parameters prevailing in the individual European insur- ance markets, the following sections take a closer look at the trends of the segments in our domestic market of Germany.

Life insurance in 2009 and 2010

In 2009, the German life insurance industry is expecting the volume of premiums to be slightly below that of the previous year. Nev- ertheless, the stability shown by life insur- ance during the crisis on the financial mar- kets will further strengthen public confi- dence in this form of old-age provision in the future. In the coming years in particular, the importance of the guarantees will increase with both classic annuity insurance as well as with unit-linked products. The trend towards provision policies with payouts in the form of an annuity appears likely to continue.

The Annual Tax Law 2009, passed by the German Upper House on 19 December 2008, also includes changes in taxation on life insurance policies and, overall, strength- ens provident insurance solutions.

As regards private old-age pensions, we are expecting positive stimuli from the exten- sion of the “Riester” pension products (“Residential Riester”). The state-subsidised Riester pension and basic pension products

will therefore remain attractive, meaning that the pleasing development of recent years is likely to continue. Unit-linked insur- ance solutions remain an attractive alterna- tive to classic products for many groups of clients; the long-term trend towards a widening of this product spectrum will con- tinue.

In terms of company pension schemes, the “Accounting Law Modernisation Act” (Bil- MoG) that will probably be passed in 2009 will receive particular attention. Under this law, pension obligations in German Gaap balance sheets will probably have to be valued using a procedure based more on actual market conditions. This could result in a notable increase in the pension obli- gations of companies. Pension funds or provident funds provide the companies concerned with adequate opportunities to externalise these pension obligations. The planned “Law for Improving the Parame- ters for the Protection of Flexible Working Hour Rulings” (Flexi II) deals above all with the protection of working-life time accounts against insolvency. The effects on these old- age provision solutions remain to be seen.

Private health insurance in 2009 and 2010

Fundamentally speaking, the “Act to Strengthen Competition in Statutory Health Insurance” (GKV-WSG) came into force on 1 April 2007. Among other things, this intro- duced compulsory insurance for all resi- dents in Germany as from 1 January 2009 and, at the same time, excluded termination of substitutive health insurance by private insurers. Persons not insured or liable to insurance under the statutory health insur- ance scheme will be liable to insurance in the private health insurance scheme as from 1 January 2009.

In addition, all private health insurers provid- ing substitutive health insurance have been obliged to offer a basic tariff with effect from 1 January 2009. This offers benefits compa- rable with those of the statutory health insurance scheme but is calculated with ageing reserves. In the basic tariff, the insur- er cannot charge risk surcharges or agree the exclusion of benefits. As the premium for the basic tariff cannot exceed the maximum premium under the statutory health insur- ance scheme, this tariff will be subsidised by those with full insurance, resulting in a cor- responding trend towards higher premiums. Since 1 January 2009, too, ageing reserves in private health insurance have been trans- ferable in the event of a change of insurer. Policyholders taking out private health insur- ance after 1 January 2009 are credited with the ageing reserve for the basic tariff plus the 10 % surcharge when changing insurers. Pol-

icyholders who took out private health insur- ance before 1 January 2009 will be credited with the ageing reserve for the basic tariff if they terminate during the first half of 2009, however only if they transfer to the basic tar- iff of another insurer. This new ruling will also lead to higher premiums throughout the industry.

1 January 2009 saw the introduction of the Health Fund in the statutory health insur- ance scheme. On 29 October 2008, the Fed- eral Cabinet agreed on a nationwide, uni- form contribution rate for persons with statutory health insurance. For many people with statutory health insurance, this has led to a higher contribution. In addition, self- employed persons voluntarily insured under the statutory health insurance scheme have lost their entitlement to sickness benefit since 1 January 2009. To cover this risk, there is therefore a need for a supple- mentary tariff under the statutory health insurance scheme or a private daily sickness benefits insurance.

The rulings of the healthcare reform lead us to expect only moderate growth again in 2009. The net intake of new clients will remain strongly affected by the raising of the compulsory insurance threshold and by the fact that the healthcare reform makes it more difficult for employees to transfer from statutory to private health insurance. Never- theless, it is to be assumed that there will again be a net increase in new clients for full insurance in 2009, although this rise will remain at the moderate level of recent years. As the healthcare reform will not

Prospects

well as in rationing of medical care for per- sons in the statutory health insurance scheme. Against this background and given the continued high need for first-class healthcare among wide sections of the pop- ulation, a positive development can be expected in supplementary insurance. The result is that for 2009 we are expecting a growth in premiums in private health insur- ance of 3 % – slightly above the figure for the previous year.

In 2010, the 3-year changeover period, in force since February 2007, will start to run out and lead to a slightly higher level of new clients among employed persons. Overall, it is not possible to make any reliable forecast concerning the development of new clients in private health insurance for 2010. Only in 2009 will it become clear how the industry has started out in the “new” world of private health insurance and how the constitutional court will rule on the appeals of the private health insurance companies.

Non-life insurance in 2009 and 2010 Developments in terms of non-life insurance over the coming years will depend to a sig- nificant extent on overall economic develop- ments. A decisive factor here will be whether the measures introduced to stabilise the banking sector are effective in the long run.

Over 80 % of the overall demand for insur- ance stems from private clients. At present, we do not expect any improvement in the economic situation of private households; their real income has hardly increased at all even in years of strong economic growth. Additionally, falling sales and investment levels are also likely to lead to restrained demand from industry and commerce. A fur- ther factor is the greater price sensitivity of households and companies which leaves hardly any room for increases in premiums. The high level of market penetration already achieved and the continuing intense price competition – above all in motor insurance – are also continuing to weigh down on sales in property and casualty insurance.

Experience shows that an economic down- turn would also have a dampening effect on the level of claims, thus reducing the pres- sure for premium adjustments. Irrespective of this, natural disasters such as hurricane “Kyrill” at the beginning of 2007 or hurricane “Emma” in 2008, or the hailstorms this sum- mer lead to a review of premiums in the nat- ural hazards line of business.

Overall therefore, property-casualty insur- ance are expecting premium income to remain almost constant in the 2009 and 2010 financial years. Growth in premiums of around 1.5 % per annum is expected in legal expenses insurance.

ERGO’s performance

Despite the high level of uncertainty con- cerning the effects of the gloomy general economic environment, we expect to be able to achieve higher premiums over all seg- ments in the coming year. The long-term nature of the contractual relationships with our clients, above all in personal lines insur- ance, will play an important role in this respect.

We expect total premium income in life insurance to rise, above all as a result of our international business. This will also be helped by the first-time consolidation of BA-CA Insurance whose premiums have been shown in our Group figures since the fourth quarter of 2008. In Germany, we, like the market, are expecting a slight fall in pre- mium income. As far as new business is con- cerned, the economic environment is likely to throw up major challenges, even if clients are tending towards more secure forms of investment and provision as a result of the financial crisis. We assume that provision business with regular premiums will develop more positively than that with single premi- ums.

In the health segment in Germany, we are aiming for growth of around 2 %; and a high- er increase of premiums should again be possible abroad. Especially in the case of supplementary insurance policies, we should achieve a good level of new business as a result of the growing awareness of the general public of the need to take out cover against the increasing gaps in benefits of the statutory health insurance scheme. The first-time consolidation of “Europäische” and “Mercur” within the health segments will have an additional effect.

In non-life insurance we expect an increase in premiums, above all as a result of interna- tional growth. We are also aiming for a slight increase in our German business in 2009 although the market is stagnating. However, it must be feared that the poor overall eco- nomic environment will have a greater effect on the demand for insurance in 2009 than we currently expect. For example, there is unlikely to be any rise in premiums in Ger- man motor insurance in 2009 because of the collapse in sales of new and used cars. On the other hand, it is a fact that people tend to show an increased need for security in dif- ficult economic times. We wish to maintain the combined ratio, including legal expens- es insurance, at the good level of under 95 %.

Prospects

Total premium income is likely to lie within a range of € 18.7bn to € 19.4bn in 2009 com- pared to € 17.7bn in 2008. Given the high volatility of the capital markets it is not possible to offer a serious prognosis for the consolidated Group results.

Objectives of risk management

Risk management is an important element in corporate management. In addition to the function of early recognition of develop- ments that could endanger the continued existence of the Company (Section 91 para. 2 of the German Stock Companies Act [AktG]), a task of risk management is to maintain the financial strength required to secure the claims of our clients and to create sustainable value for our shareholders. This is achieved by means of risk management that encompasses all divisions. In our risk management we adhere to the German Con- trol and Transparency Law (KonTraG) as well as to the requirements of Section 64 a of the German Insurance Supervision Act (VAG). Organisational structure

of risk management

To ensure efficient risk management, the ERGO Insurance Group has set up specific risk management functions and bodies. The central Integrated Risk Management (IRM) unit ensures risk management throughout the Group and is supported in its role by decentral risk management structures in all divisions of the Group. This risk manage- ment organisation is headed by the Chief Risk Officer (CRO) to whom the individual, decentral risk managers report. The duties of the CRO include the identification, assessment, control and monitoring of risks, as well as reporting them to the Risk Com- mittee. This committee is responsible for setting up and monitoring the risk manage- ment strategies, systems and processes.

entire risk management system, consisting of risk criteria, limits and governance processes, complies with the regulatory requirements and the guidelines applicable throughout the Group. Risks are recognised at an early stage and managed in an opti- mum manner.

Risk strategy

The basis for the assumption of risks is formed by the requirements and decisions of the Board of Management concerning risk tolerance, as derived from the risk strategy approved within the scope of the annual planning and geared towards the capital and liquidity base as well as towards the volatili- ty of earnings. In this respect, account is taken of both criteria for the overall portfolio as well as of supplementary criteria with which high risks, concentrations, loss accu- mulations and systematic risks can be limit- ed and managed throughout the Group. Our Strategic Risk Management Framework plays a central role within the scope of these requirements and processes.

Risk management cycle

The risk appetite determined by the Board of Management enables us to consider the lim- its and rulings of relevance for risk manage- ment as early as during the business plan- ning stage and to anchor these in the opera- tive management of the company. In the event of capital bottlenecks or conflicts with the limit and regulation system, fixed esca- lation and decision-making processes are followed which ensure that business inter-

Risk report