“The Debt Problem is Shifting to Core Europe”

Credit Suisse’s problems didn’t have that much to do with the change in interest rates – they were probably more a question of investor confidence gradually ebbing away. Government guarantees were needed to make the takeover by UBS possible. In any case I didn’t envy the Swiss government. Switzerland’s a small country that had to deal with a gigantic bank – and incidentally, one that’s now even much bigger – whose biggest risks weren’t even situated in its home country.

In our sector, money is tied up for much longer terms and doesn’t depend on market financing. Even if a lot of people terminate their policies at the same time, that’s something we can still handle very readily. Of course you can never say “never,” but the risks in insurance are low compared to a bank.

In property and casualty insurance we benefit a great deal from the rise in rates, step by step, because we can invest premiums at a higher return. It’s more complicated in life insurance, because you first get unrealized losses on fixed-rate securities. But it’s extremely unlikely that we would have to sell securities like that at a loss. Generally, rising interest rates are a positive factor – it just takes a long time for them to gradually filter into our securities portfolio. Meanwhile, as interest rates rise so does our margin from long-term liabilities. But I think within the medium term, interest rates won’t stay as high as they are now – I expect a future level around three percent. We probably won’t be so quick to get back to the two percent the central banks are aiming for, because the world needs a certain base inflation rate so it can clear its debts.

That’s the most important effect. The ECB’s massive bond buy-backs not only massively pushed down interest rates but perverted the pricing of risk, especially in government budgets. On top of that, the positive nominal rate now means we don’t need to take such big risks on new investments to get a halfway positive return, the way we had to do in a zero-interest and negative-interest environment.

In property and casualty insurance, that will represent at least a billion euros more in operating profit. In life insurance it’s not as easy to say, because there will be short-term negative effects. But for the long term, the influence will likewise be very, very positive.

At least, the ECB reacted much too late. The U.S. central bank did even worse, because the driving forces for inflation in the USA were even more their own doing, and were stoked less by high energy prices. But ultimately, on either side of the Atlantic, lax monetary policy encouraged politicians to spend money they didn’t have. They thought interest rates would remain low forever. Now we’re getting a one-two punch in the face – a left hook from rising interest charges and a right from declining tax revenue because of a recession or at least a stagnation – even if high inflation is cushioning the debt burden some at the moment.

Up to the end of June, the ECB will still be reinvesting immense amounts in government bonds. But you also have to realize that many countries have made considerable progress. In Greece, for instance, the government has launched impressive reforms. On the other hand, France and Germany are still spending money by the bushel full. The debt problem is shifting to core Europe, and on top of that, growth here is weaker than on the periphery. That can’t keep going the way it is, and politicians have finally got to tell people so.

I think that’s a bit exaggerated. Germany is very resilient. But we do need to think about how we want to be successful in the future. Up to now, we’ve been able to export very heavily to China, we’ve bought cheap energy from Russia, and the Americans have covered a large share of our defense costs. That model is over and gone.

We need to talk about that, and also have an honest economic debate about compromises and their implications for the taxpayer. So far, I’ve seen nothing of the kind. We’ve been debating for years, for instance, about our badly functioning infrastructure of roads, rail and telecommunications, and about the condition of our schools. But not enough gets done. It’s true parliaments and ministries get bigger and bigger, but the citizen sees no progress from the work they’re actually doing there. That leads to citizens who get angry at the political class and vote more and more for the parties that appeal to rage. Our society can’t afford a polarization like that.

We’re an insurance company, so we’re familiar with risk management. And it’s true, we’ve been astonished at people’s naiveté at how supply chains function under stress. And incidentally, that also goes for the supervisory boards at the companies that were affected. If you only get semiconductors from a single source, for instance only from Taiwan or only from China, that’s not diversification, which means it’s also bad risk management. They’ll have to do better at that in the future. But that lowers growth, because maintaining inventories and setting up new production sites increases production costs.

That one dealt mainly with what the government would do after the COVID restrictions ended. I think it’s very impressive how the Chinese government invites representatives of business, and also Nobel Prize winners, to hold frank discussions so as to get their opinions. The Chinese don’t like it when you communicate through the media instead of through personal conversations. But there, you can certainly address critical questions in serious detail. Of course, after that they’ll make their own decisions however they like.

For decades the West assumed China wants to become like us. That mistake couldn’t have been any bigger. What does it mean if that’s not the case? I need to be able to do business with a partner even if he doesn’t want to live or act the way we do. And then you have to think carefully about where the limits lie, what we can accept as a society or as a company, and what we can’t. But for us, that hasn’t changed in the past two years. We’ve long been optimistic, but cautious. You need to operate on an equal footing and make sure you can’t be blackmailed.

The insurance business is difficult. First of all, in both P&C and life insurance, almost 80 percent of what are known as “profit pools” are in the hands of four or five companies at most. Foreigners are not going to be able to pick up any massive market share over the next ten or twenty years, except maybe through acquisitions – and that’s not trivial, either. Second, large segments of the market, like car insurance, aren’t really profitable. For us, the biggest opportunities are in the area where we’re strong, at the point where insurance and the asset management business intersect. The Chinese too are going to have to start diversifying their capital investments nationally and internationally. We foresee growth potential for ourselves mainly in funds. In insurance, this is going to be more of a niche business, for instance in life and health insurance for high-expectation private clients.

We have a very high regard for Switzerland. It’s a very stable, very profitable market. We’ve always wanted to be considerably bigger there, but unfortunately that hasn’t happened so far. We still hope that someday we’ll have a chance to do that. Switzerland is a very professional market, but also a mature one where growth just isn’t especially vigorous.

We’ve wanted to for a long time. But the figures have to add up, and at the moment there’s just nothing.

No, that’s wrong. We had a BaFin audit at Allianz SE, our parent company. That routine audit related not to insurance operations, but to the regulatory requirements for insurance IT. They arrived at findings about certain areas that we’ve also discussed critically with BaFin. We’re in the process of remedying those deficiencies with a focused list of steps. Even before the audit, we had already set up a program to remedy potential IT shortcomings, including after the findings from the fraud case at our Structured Alpha fund in the USA. As of today, there’s been no decision or indication from BaFin that there will be some addition to capital requirements. There’s an organized procedure for decisions like that, with hearings, opportunities for protest, and in a worst case, also going to court. If we do get as far as a decision from BaFin, we’ll review our options carefully. You can assume we’ll take that very seriously.

Here we have to differentiate by how hard it is to digitalize a particular business. In car insurance, for instance, it’s complicated because there’s a very complex chain from the car dealer to body shops, the claims adjuster and lawyers, and also the licensing agencies. A lot of so-called innovators have underestimated that. On the other extreme, I have completely digital products like travel insurance. It’s dangerous if we have to acquire customer access through an intermediary by bidding in an auction. If I have to bid through something like Google for the input “economical car insurance,” typically the margin goes to Google, not to us. So we need a brand that’s so strong customers either come to us automatically, or that we don’t need to bid so much money.

We’re investing heavily in insurance for e-vehicles. They have a lower claims frequency than conventional cars, but the average claim is significantly higher. You can’t even touch a badly damaged vehicle until it’s not carrying an electrical charge. Even though a claim like that is rare, for an e-car it results in very high costs of several thousand euros. A lot of services we’ve developed over the past few years are being used more and more heavily – customers have an immense need for advice about which e-car to drive, and how high the total cost would be, including the cost of repairs.