HDI (Haftpflichtverband der Deutschen Industrie Versicherung auf Gegenseitigkeit V.a.G.)

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HDI (Haftpflichtverband der Deutschen Industrie Versicherung auf Gegenseitigkeit V.a.G.)

Riethorst 2
D-30649 Hannover
Germany
Telephone: (49) 511 645-0
Fax: (49) 511 645-4545
Web site: http://www.hdi.de

Private Company
Incorporated: 1903 as Haftpflichtverband der Deutschen Eisen-und Stahlindustrie V.a.G.
Employees: 6,438
Total Assets: EUR 14.5 billion ($10.9 billion) (2001)
NAIC: 524126 Direct Property and Casualty Insurance Carriers; 52413 Reinsurance Carriers; 524128 Other Direct Insurance (Except Life, Health, and Medical) Carriers; 524113 Direct Life Insurance Carriers

HDI (Haftpflichtverband der Deutschen Industrie Versicherung auf Gegenseitigkeit V.a.G.) is Germany’s third largest insurance group by premium income. Headquartered in Hannover, Germany, HDI is present around the world. The company’s largest business division is reinsurance arm Hannover Re, one of the world’s largest reinsurers. Most other of HDFs insurance operations, including life, accident, property and casualty, and auto insurance for private customers, as well as the management of its financial assets, are organized under the umbrella of Talanx AG. HDI’s core business, liability and casualty insurance for corporate clients, is organized as a mutual insurer, a membership association which was founded at the beginning of the 20th century.

Origins in 1903

In December 1903, a group of German industrial entrepreneurs established a new organization to cover their liability insurance needs. Founded in Frankfurt am Main, Haftpflichtverband der Deutschen Eisen-und Stahlindustrie was not just another insurance company. Under German insurance law, the Haftpflichtverband had the legal form of a nonprofit association, a “Versicherungsverein auf Gegenseitigkeit,” in short V.a.G. This meant that its members were the insured as well as the insurers, cooperatively determining their insurance needs and the policies and conditions for their coverage. Such a new entity was unheard of in the world of business liability insurance, which was dominated by private insurance companies. The birth of the Haftpflichtverband, however, did not come out of the blue.

Business insurance cooperatives already existed in Germany around the turn of the 19th century. One of their domains was insuring workers against injury in case of work-related accidents. This was especially necessary in such industries as mining, steel and iron processing, and heavy machine building, which by their nature involved hazardous tasks. In 1900, a new law encouraged the “Berufsgenossenschaften,” as those cooperatives were called, to establish their own organizations to offer business liability insurance for their corporate members. Shortly after the initiation of the new law, Hermann Blohm, co-owner of the Hamburg-based shipyard Blohm+ Voss and representative of the northwestern chapter of the Berufsgenos-senschaft for the iron and steel industry, proposed to undertake a survey among the organization’s corporate members regarding to their liability insurance needs. Blohm’s proposal was approved and the survey revealed that 237 out of 312 member firms had bought liability coverage from private insurers, leaving one quarter of all members uninsured. In the 68 cases in which firms that held liability policies were reimbursed for damage by their private insurers, the ratio of claims paid out to premiums paid was just 2 percent, hinting at the handsome profits the insurance companies must have made. The survey also showed that many of the participating companies were interested in a more affordable liability coverage that was tailored specifically to the needs of heavy industry.

Within the next two years, a commission consisting of members of the Berufsgenossenschaft in the cities Hannover, Saarbriicken, and Mainz worked out detailed proposals for a new liability insurance entity covering the German iron and steel industry. The commission also negotiated conditions with the German government agency for the insurance industry, the Reichsaufsichtsamt, and solicited letters of intent from its members to join the new organization. Designed to be independent from the Berufsgenossenschaft, the new association benefited from the organizational know-how gathered by its creator. The Haftpflichtverband’s founding members especially emphasized being independence from private insurers. However, the Reichsaufsichtsamt requested that the Haftpflichtverband get reinsurance coverage. Since German insurers did not have an interest in backing up a new competitor, the Haftpflichtverband had to look abroad for a reinsurance partner and finally found one in Austrian insurer Erste Österreichische Allgemeine. After the new organization had been formally established at the founding meeting in late 1903, the Haftpflichtverband, consisting of 176 corporate members from six Berufsgenossenschaften of the iron and steel industry, started operations in April 1904.

Growth and Turmoil in the Early Years

In the 15 years following its foundation, the Haftpflichtverband’s membership soared. At the end of its first year in business, the number of its members had climbed to 464. By 1920, the Haftpflichtverband counted 4,204 member firms. This expansion was only possible because the initially narrow definition of potential member candidates was broadened. One of the fundamental ideas at the time of the Haftpflichtverband’s foundation was to limit membership to companies with very similar insurance needs in order to make risks comparable and more calculable, thereby keeping cost for liability coverage low. However, after the last of the eight German Berufsgenossenschaften in the iron and steel industry had joined the Haftpflichtverband in 1909, its bylaws were changed to allow member companies of the Berufsgenossenschaften in related industries to become part of the organization. The first new members admitted into the Haftpflichtverband were from the mining industry, who joined beginning in 1919, followed by the precision mechanics and electric appliances industries in 1920, the chemical industry in 1928, the southern German precious and non-precious metal processing industries in 1935, and the pottery, tobacco, leather, paper, and brewing industries in 1936. In addition to expanding its membership base, the Haftpflichtverband broadened its range of services. In 1928, its members were offered auto insurance; in 1932, accident insurance was added. To reflect the broadened focus of the association in its name, the Haftpflichtverband’s name was changed to Haftpflichtverband der Deutschen Industrie (HDI)—the liability association of German industry—in 1936.

While the Haftpflichtverband achieved remarkable growth in the first three decades of the 20th century, it was far from steady, being frequently interrupted by the major economic downturns resulting from Germany’s political ambitions. The attempt of Germany to become a colonial power resulted in World War I. Consequently, Germany’s heavy industry became engaged in building ships, tanks, and other goods for the military. Because of its solely domestic membership base, the Haftpflichtverband was not impacted directly by the beginning of World War I in 1914, and the association did not loose any of its customers, as many of Germany’s export-oriented companies did. However, many of its member companies were crucial for Germany’s war economy. With pressure to produce more war goods in less time using old machines and less qualified personnel, the risk of work-related accidents rose significantly—and so did the liability risk. The main threat, however, emerged slowly during the war years and accelerated after Germany’s defeat in 1919, resulting in the most serious economic depression the country had known.

To finance the war and to pay off the enormous reparations demanded by the Allied countries, the German government freely used the easiest money machine at hand—the printing press. Thereafter, the value of German currency’s rapidly declined, plummeting after World War I to half of its prewar value. To aggravate this state of affairs, the German government, by forcing domestic enterprises to buy war bonds that became worthless once the conflict had ended with Germany’s defeat, made it impossible for companies to prevent the depreciation of their financial assets by investing abroad. This policy, together with accelerating inflation, posed a special threat to the insurance industry. Spiking inflation made risk calculation and the evaluation of occurred damages increasingly difficult and ultimately led to greater costs; concurrently, the value of premiums paid was diminished, thus draining financial reserves. In case of the Haftpflichtverband, its reserves almost entirely “evaporated” during the hyperinflation of 1923. On the other hand, the organization’s policy of basing its premium charges on a member’s payroll cost—which was also rising during the inflation years—averted total ruin. In 1923, the Haftpflichtverband abandoned its Austrian reinsurer, which had frequently tried to lure its members away with its own liability policies, and entered a partnership with the German industrial insurer Gerling Konzern. Together they founded the Eisen-und Stahl Versicherungsaktiengesellschaft, in which executive directors and board members of the Haftpflichtverband owned 75 percent of the shares.

Company Perspectives:

The Group operates in the following four corporate segments: primary property and casualty insurance, primary life insurance, reinsurance, financial services. The motto of each segment is sound solutions in insurance and financial services accompanied by good service. The top priority of HDI’s income-oriented strategy is the long-term security and financial stability of the Group in the interest of its private and industrial policyholders. HDTs strategy for the future is to ensure that results remain stable; HDI Group is concentrating not only on developing the divisions but also on systematically expanding life insurance and old-age provision.

A short period of economic stability in the 1920s was suddenly interrupted by the onset of the Great Depression in 1929, resulting in one-third of Germany’s workers losing their jobs. Growing mass poverty provided the increasingly polarized and radical political climate that brought Adolf Hitler’s National Socialist Party into power in 1933. By 1936, the country was preparing for another war. While the Nazis centralized economic politics initially provided some relief in the job market, it also contributed to setting the stage for World War II, which was even more devastating for the country’s economy. Centrally administered insurance premiums, artificial restrictions in the insurance market, and the replacement of elected delegates to the Haftpflichtverband’s governing bodies by Nazi-friendly managers characterized the years of the Nazi rule, which ended with Germany’s unconditional defeat in May 1945.

Becoming a Full-Service Insurer in the 1950s

After the country had been rebuilt, the German economy not only recovered but subsequently entered two decades of strong growth. Industrial output more than doubled between 1950 and 1960. During this time, HDI again expanded its membership base, began offering a broader range of insurance coverage, and revamped its organization, setting off on the path to becoming an all-round insurer.

Prosperity for All, a book written in the 1950s by the country’s new economic minister Ludwig Erhard, became the vision of the postwar generation. For HDI, the year 1953 became a historical stepping stone as the company took a strategic step forward. In that year, HDI, which formerly had limited its clientele to corporate members of the Berufsgenossenschaften, changed its bylaws to offer insurance coverage to individuals. Also in 1953, HDI’s organizational structure changed. The split of Germany into two states after World War II had left the association with a geographically unbalanced network of branch offices—some of which had been dissolved—with four of them located in Hannover. The 14 different divisions covering certain industries were replaced by nine regional branch offices. The new bylaws also cut back the number of directors. However, HDI stuck with its concept of being an insurer without a sales organization. This strategy enabled the company to keep administrative costs extremely low—at about 12 percent of premium income—making it possible to attract new customers by offering affordable premiums.

HDI’s fastest growing business segment in the 1950s and 1960s was auto insurance. Between 1958 and 1967, premium income from auto insurance rose an average of 20 percent per year. However, cost for damage payments also increased significantly, sometimes even faster than premium income. Since auto insurance accounted for at least two-thirds of HDI’s total business, the company took steps to expand its product range in order to better balance risks. Beginning in 1959, HDI offered fire, theft, and water damage insurance, followed by broken glass and storm insurance in 1962.

In the area of fire insurance, HDI had been cooperating with the Feuerschadenverband Rheinisch-Westfälischer Zechen, another cooperative insurer specializing in fire insurance. HDI had helped launch the Feuerschadenverband in 1920, and part of its membership overlapped with HDI’s. When HDI itself started offering fire insurance, the relationship between the two grew somewhat tense. However, in 1968 HDI and Feuerschadenverband started negotiations which resulted in the merger of the two, effective January 1, 1970. Since the proposed name for the new entity, Versicherungsverband der Deutschen Industrie V.a.G., was not approved by the German authorities, it was called Haftpflicht- und Feuerschadenverband der Deutschen Industrie V.a.G. Six years later the company’s name was changed back to Haftpflichtverband der Deutschen Industrie V.a.G.

The merger had brought HDI closer to the leading group of German insurers. In the 1970s and early 1980s, the company intensified its cooperation with Hannoversche Leben, a Hannover-based life insurer with the same legal form as HDI’s. The reinsurer of the Feuerschadenverband, Aktiengesellschaft für Transport- und Riickversicherung, was renamed Hannover Riickversicherung (Hannover Re) in 1976. One year later, HDI, together with Hannoversche Leben, established Hannover Rechtsschutz-Versicherungs-AG, a new subsidiary offering legal insurance, which was taken over by HDI in 1981. In 1980, Hannover Allgemeine Versicherungs-AG, a subsidiary of Hannover Re, started operations.

Key Dates:

1903:: Haftpflichtverband der Deutschen Eisen-und Stahlindustrie V.a.G. is founded.
1919:: The company moves its headquarters from Saarbrücken to Hannover.
1936:: The company is renamed Haftpflichtverband der Deutschen Industrie (HDI).
1953:: HDI opens membership to individuals.
1970:: HDI merges with Feuerschadenverband rheinisch-westfälischer Zechen.
1987:: Security consulting subsidiary HAST Hannover Sicherheitstechnik GmbH is founded.
1991:: Life insurance subsidiary HDI Leben AG is established.
1994:: Initial public offering of Hannover Re’s stock is made.
1996:: HDI acquires Transatlantische Lebensversicherung AG and Citibank’s German insurance operations.
1996:: Holding company HDI Beteiligung AG is established.
1998:: The company enters two joint ventures with Deutsche Postbank AG.
2001:: HDI’s private insurance business is transferred to HDI Privat Versicherungs AG.

While HDI’s domestic organization was growing, the business climate in Germany turned around completely after the oil price shock of October 1973, when oil prices skyrocketed after Arabian oil-producing countries greatly reduced their output. It took a decade for the German economy to recover, putting the market for industrial insurance, especially fire insurance, under high pressure. With environmental protection and conservation of natural resources becoming a new paradigm, the risks of technological progress were looked upon more critically. The insurance industry was also faced with calculating previously unknown risks, such as those associated with nuclear power stations. These new risks had to be calculated and translated into new insurance policies. Another new wrinkle in the area of liability insurance was the manufacturer’s liability for the quality and performance of its products, which was introduced in 1976. In the 1980s, disaster prevention became more and more important. HDI also established several consulting subsidiaries that advised clients in security issues regarding fire safety, auto fleet safety, and the prevention of environmental pollution. Altogether, the number of HDI subsidiaries rose from four at the end of the 1970s to 22 by 1989.

Expansion and Refocusing: The 1990s and Beyond

The 1980s and 1990s were characterized by the rapid globalization and consolidation of the world’s financial markets. In summer 1990, the European Union liberalized the insurance market for industrial risks, allowing insurers to offer their products and services in any of its member countries. Four years later, the rest of the insurance market followed suit. HDI followed its industrial clients abroad, setting up foreign subsidiaries in Austria, the Netherlands, Belgium, France, the United Kingdom, Brazil, Argentina, and the United States between 1978 and 1987. By 1992, the number of HDI’s foreign subsidiaries reached 19, bringing in almost one-third of the company’s premium income from outside of Germany. In 1994, HDI entered a strategic partnership with Britain’s third largest insurer, Royal Insurance (Global) Ltd. This partnership opened Royal’s network of branch offices in over 80 countries to HDI, making it possible for the company to insure its industrial clients anywhere in the world.

While the reunification of East and West Germany in October 1990 brought about a new boost for business, it also led to a dramatic increase in claims, mainly in auto insurance, which still accounted for a considerable part of HDI’s revenues. After the company slipped into the red in 1990, HDI’s management decided to venture into life insurance, a less risky insurance segment. However, a newcomer in this market, HDI had a sluggish start. To lower cost, the company started reorganizing its operations in 1993, cutting back on staff and reducing the number of main branch offices from 19 to 11. One year later, Hannover Re went public on the German Stock Exchange, and a holding company was set up for HDI’s foreign subsidiaries. A cautious approach to taking on new risks and raising auto insurance premiums, together with the cash from Hannover Re’s initial public offering led the company’s insurance operations back to profitability in 1994.

Beginning in the mid-1990s, HDI expanded significantly, focusing on new business in direct life insurance and on international growth. In 1996, the company acquired Citibank’s German insurance subsidiaries, including a direct life and an accident insurer. These were organized into a new subsidiary, CiV Versicherung AG, and continued selling their policies at Citibank branch offices. In the same year, HDI took over life insurer Transatlantische Lebensversicherung AG from British Lloyds Abbey Life, which was renamed Aspecta Lebensversicherung AG. Other acquisitions included Italian insurer BNC Assicurazioni S.p.A., Brazilian Hannover Paulista Seguros S.A., and Swedish insurer Skandia in 1997, followed by special insurer Claredon Insurance Group in the United States in 1998. In that year, HDI also signed an agreement with one of Germany’s leading banks for private customers, the banking division of Germany’s privatized post office Deutsche Postbank AG, to partner up and sell life and accident insurance at Postbank’s large network of branches at German post offices. The two joint ventures, PB Lebensversicherung and PB Versicherung AG, started operations in 1999. Also in that year, the planned merger of HDI with HUK-Coburg, Germany’s second largest auto insurer with the same legal form as HDI, was vetoed by HUK’s member representatives.

As a result of its expansion, HDI doubled its premium income between 1993 and 1999. However, a large number of claims and the high investment in the company’s new ventures resulted in a loss in 2000 and 2001. Although HDI held on to the legal form of a mutual insurance association, the company made significant changes at lower levels of its organization. In 1996, a new holding company, HDI Beteiligung AG, was founded as a management holding for most of HDI’s operations. This enabled the company to raise funds in the world’s capital markets to finance its rapid expansion. In 2000, HDI announced that it was planning to take the sub-holding, which in the meantime had been renamed Talanx AG, public by 2004 or 2005. In 2001, the company spun off its insurance business for private customers, which was transferred to newly formed HDI Privat Versicherung AG, a Talanx subsidiary. HDI, the mutual insurer, refocused on its core business with industrial clients. In mid-2002, HDI’s management saw possibilities for further growth in corporate pension plans, international life insurance, financial services, and possibly a takeover of Gerling Globale Rück, the reinsurance arm of one of HDI’s main competitors which was put up for sale in summer 2002. To strengthen the company’s financial basis, HDI was also planning to offer another 20 percent of Hannover Re’s stock for sale under favorable stock market conditions.

Principal Subsidiaries

Talanx AG; ASPECTA Global Group AG; HDI International Holding N.V. (Netherlands); HDI Pension Strategy & Management GmbH; HDI Rechtsschutz Versicherung AG; HDI Privat Versicherung AG; HDI Pensionsfonds AG; HDI Pensionskasse AG; HANNOVER International AG für Industriever-sicherungen (Austria; 99.76%); HANNOVER International (Belgie) N.V. (Belgium); HANNOVER International Insurance (Nederland) N.V. (Netherlands); HANNOVER International (France) S.A. (99.99%); HANNOVER International España Cía de Seguros y Reaseguros S.A. (Spain); International Insurance Company of Hannover Ltd. (United States; 75%); HANNOVER International Seguros S.A. (Brazil); HDI Assicurazioni S.p.A. (Italy; 66.08%); CiV Versicherung AG; PB Versicherung AG (50%); ASPECTA Versicherung AG; Hannover Finance, Inc. (United States; 70.32%); Insurance Corporation of Hannover (United States; 75%); Clarendon Insurance Group, Inc. (United States); Magyar Posta Biztositá Rt. (Hungary); Hannover COOP Bulgaria Insurance Company A.D. (Bulgaria; 95.01%); Hannover Riickversicherungs-AG (75%); Euro International Reinsurance S.A. (Luxembourg); E + S Riickversicherungs-AG (51.57%); Hannover Life Reassurance Company of America (United States; 75%); Hannover Life Reassurance (UK) Ltd. (75%); Hannover Life Re of Australasia Ltd. (Australia; 63.29%); Caisse Générale de Réassurance S.A. (Luxembourg); E + S Reinsurance (Ireland) Ltd. (51.57%); HDI Reinsurance (Ireland) Ltd.; Hannover Life Reassurance (Ireland) Ltd. (75%); Hannover Reinsurance (Ireland) Ltd. (75%); Hannover Reinsurance Group Africa (Pty.) Ltd. (South Africa; 72.64%); Hannover Re (Bermuda) Ltd. (75%); Hannover Re Sweden Insurance Company Ltd. (75%); CiV Lebensversicherung AG; ASPECTA Lebensversicherung AG (Germany); HDI Lebensversicherung AG; PB Lebensver-sicherung AG (50%); HANNOVER International Seguros S.A. (Brazil); HDI Assicurazioni S.p.A. (Italy); ASPECTA Assurance International Luxembourg S.A.; ASPECTA Assurance International AG Liechtenstein; ASPECTA Japan KK; Magyar Posta Eletbiztositá Rt. (Hungary); HDI Asset Management GmbH; Ampega Investment AG (90%); Ampega Immobilien Management GmbH.

Principal Competitors

Munich Re; Allianz AG; Gerling-Konzern Versicherungs-Beteiligungs-AG; AMB Generali Holding AG; AXA Konzern AG; ERGO Versicherungsgruppe AG; GeneralCologne Re.