The German life insurance industry—Europe’s third largest, with more than 85 million policies in force and annual premium income of $57 billion—faces hard times. Since the mid-1990s, gross margins and profits have been dropping steadily. More recently, premium income in major growth segments has started to decline as well. Whole-life insurance, the industry’s stalwart, has been hardest hit: new business has been ebbing continually, and the total number of current policies has fallen. Indeed, benefit payments on expiring policies can no longer be covered by premium income in this line. These developments are starting to hurt the industry-wide return on equity, which for all German life insurers has fallen from 27.2 percent in 1986 to 21.7 percent in 1997.

At the same time, Germany’s upward of 80 life insurance companies have found themselves increasingly entangled in a brutal "damn-the-torpedoes" competition for market share. Meanwhile, new market players such as banks, mutual funds, and securities brokers have become more than eager to enter the fray. Faced with all-out competition from within and without, the country’s life insurers have come under increasing pressure to restructure and consolidate. With entrance barriers to the protected German life insurance market gradually disappearing, strong and...