There’s a simple rule for winning against the best soccer team in Germany, Bayern Munich: don’t play soccer against them. Play chess. The same principle also applies to incumbent insurers and InsurTech companies in Germany. The most successful InsurTechs in Germany don’t challenge the incumbents at their game – they invent new rules that make the situation unpredictable. This chapter sheds light on the playing field of incumbents and InsurTechs: the insurance market in Germany.

1. The German Insurance Market is a One-stop Shop

The German insurance industry, led by Allianz and followed by Talanx, Generali, R&V, and Debeka, is by far not the largest national market. Compared to the largest market in the world, the US$1.3 trillion market, Germany only generates US$208 billion annual revenue.

But here’s the good news: the German insurance market is primarily regulated on a national level. Unlike other large markets, there are few legal differences between the 16 different states. Once you enter the market anywhere, you are ready to go nationwide. It’s a one-stop shop.

2. Incumbents in Germany: a Success Story with Underlying Problems

Over the last four decades, incumbents in Germany have set impressive records. From 1980 to today, the yearly amount of premiums of direct insurers has risen from US$38 to 208 billion, and the proportion of premiums compared to GDP has risen from 4.57% to 6.2%. At first glance, these numbers¹ indicate a strong and stable industry.

But a closer look reveals troubling details. From 1980 to today, the number of insurers has decreased by 33%. Moreover, the average age² of agents is alarmingly high:³ 48.8 years – in some cases well over 50. Studies have shown that, over time, the customer base of an agent converges to the social demographics of that agent. In the case of an ageing sales force, it is likely that the customer base is ageing too. Considering that the most lucrative insurance contracts are sold in the age cohort from 25 to 45, a lot of incumbents in Germany are sitting on a ticking demographic time bomb – especially since new players in the market target precisely the profitable customer cohort. However, the decades of success and great recent KPIs could cloud the judgement of industry veterans managing incumbents today.

3. InsurTechs in Germany: a Success Story, but no Disruption – Yet

Even though in 2016, only about US$82 million⁴ was invested into German InsurTechs, several InsurTech companies have developed exciting business models and digital products and services along the value chain. There are marketplaces such as Check24 (founded by Heinrich Blase and Eckhard Juls) or Getsurance (Johannes and Victor Becher). Some InsurTechs focus on digital insurance management systems, such as Clark (Christopher Oster), Wefox (led by Julian Teicke), Knip (Dennis Just and Christina Kehl), and Treefin (Andreas Gensch and Reinhard Tahedl). There are also direct insurers or companies working with tied agents, such as Haftpflichthelden (Stefan Herbst, Florian Knörrich, and Jan Schmidt) and Ottonova (Roman Rittweger) – and don’t forget the cashback approach of Friendsurance (Tim Kunde and Sebastian Herfurth). Several InsurTechs offer sales tools and targeted insurance, such as Massup (Fabian Fischer) or Kasko (Nikolaus Sühr and Matt Wardle). Last but not least, several InsurTechs were founded as part of the company builder Finleap (Jan Beckers, Ramin Niroumand, and Hendrik Krawinkel).

Nevertheless, the largest parts of the annual US$200 billion German insurance market are still in the hands of the incumbents. While we have seen several innovations by InsurTechs in Germany, not one has disrupted the market – yet.

4. The Technological Legacy of Incumbents Binds Billions of US Dollars

If you want to ruin the mood of a C-suite of a German insurer, mention “legacy”. Since most German insurers have focused for decades on generating record-breaking revenue by focusing on thousands of agents and brokers, the IT department was perceived as a service and cost centre. Different silo departments were ordered to develop individual solutions. This led in most cases to a highly fragmented, expensive IT landscape with limited performance. German insurers invest billions of US dollars in maintaining and developing their legacy systems using so-called “run the business” budgets. And if you compared such budgets to budgets focused on transformational activities, a lot less of these are invested in innovative digital products and services.

5. Incumbents’ Cultural Constraint Wastes Uncounted Resources

Most insurers in Germany are over 100 years old, and were founded with strong top-down hierarchies and command-and-control structures. Over time, these fossil organizations developed cultures reflecting their structures. In most incumbents, this heritage still exists today. Here’s a personal example: I witnessed a project manager from an agile e-commerce company taking over her first project at a midsize German insurer. Due to the disastrous status of the project, she reported a red light. Eventually, the CIO called her personally, making it clear that she should immediately change “red” to “green”, “because it did not look good”. Needless to say, she did it – even though this did not improve the project. Incidents like this explain the big portfolios of melon projects at incumbents: green on the outside, red on the inside.

In addition, there are C-suites employing private chefs, separate entrances, and VIP elevators. For the rest of the employees, bloated rules regulate the size of offices, access to the Internet, or the help of assistants according to one’s rank. This culture affects the performance of organizations. I once witnessed the founding of a digital unit led by an almost 60-year-old industry veteran. Instead of pushing the project, he spent the first weeks designing his new business cards and celebrating his new title, among other things. No question that this fossil manager led the digital multi-million-dollar project right off a cliff.

Another phenomenon is the HiPPO Syndrome: the Highest Paid Person’s Opinion. Who, when working for an incumbent organization, has not witnessed meetings where subject matter experts fall silent out of fear of contradicting a C-suite or senior vice president who presents his or her non-expert opinion?

In contrast to this, over the last decades, new, agile organizations have developed. Here the CEO participates with the intern in group exercises, demonstrating the eradication of formal hierarchy. Teams – especially in the development of digital products and services – organize their work independently. Input from individual employees is a part of daily business. Deviation from a process is considered creativity, and failure learning. Success stories from around the world have shown that agile organizations possess several advantages. Production is more customer-oriented, faster, and cheaper.

A century ago, fossil principles may have helped to form a US$200 billion industry. In the era of digital revolution, these principles have become cultural legacies, wasting resources and impeding modernization.

6. Incumbents Have One Strategic Advantage, but They Need to Use it

In contrast to their several disadvantages, incumbents possess one central advantage over InsurTechs: gigantic amounts of knowledge and a century of experience supported by the capture of customers’ needs, bound in terabytes of historical data.

The possibilities are endless. Imagine, for example, an insurer using sophisticated data analysis and designing artificial intelligence models to provide customers with valuable digital products and services. Imagine using big data analysis to calculate risks and crushing pricing – making high-cost coverage available to underinsured parts of society. Imagine an insurer calculating buying or cancellation probabilities and designing strategies to support selling automatically or countering the cancellation of policies with concise, omnichannel communication. All this could increase revenue significantly, but more importantly it could change the way insurance is perceived: from being a necessary evil to the social good it once provided. There is a saying: “If you’re still improving candles, you’re not likely to develop a light bulb.” To embrace digitalization’s unique opportunities, incumbents need to invest dramatically in their technical and cultural modernization. It’s not enough to digitalize with fossil tools, methods, and manpower – and large portfolios of melon projects. New methods, tools, and skills need to be used for true cultural change.

7. Insurance in Germany is Like the Bundesliga

One question remains: will new players such as InsurTechs or diversifying tech companies be able to conquer the large customer base of the incumbents with exciting digital products and services before the incumbents catch up?

I believe that the insurance industry in Germany is like the Bundesliga. Every season, certain teams like Bayern Munich are on top. Then there are the teams always struggling at the bottom of the league (for example, my favourite, Hamburg Sports Club). And every season, some teams do surprisingly well or surprisingly badly. Most likely, this will be the case in the German insurance industry too. Most top insurers will prevail. Others will struggle. We will see some positive and negative surprises. InsurTechs will establish themselves in the industry. At the same time, more and more traditional insurers will disappear faster and faster, because technical and cultural legacy prevents modernization the customers demand.

The insurance market in Germany has not yet been disrupted. But the underlying change in customer behaviour and customer expectation is dramatic. If you want to beat Bayern Munich, don’t play soccer against them. Some incumbents are slowly beginning to realize that they need to stop playing their fossil game and start to play the agile one. They are preparing or pursuing dramatic changes while other incumbents still plan to wait and see. As in soccer, the latter will lose.

Considering the state of the industry, well-funded InsurTech companies can challenge the status quo. This also applies to diversifying tech companies and first-moving incumbents. Maybe this is a once-in-a-century chance in which large changes in the German insurance market are possible – for the benefit of the customer. An exciting time for all of us.

In summary, the most successful InsurTechs in Germany don’t challenge the incumbents at their game – they invent new rules that make the situation unpredictable. This chapter shed light on the playing field of incumbents and InsurTechs: the insurance market in Germany.