Economic climate
2008 was dominated by a worldwide financial market crisis on an unimagined scale. It was triggered by upheavals on US real estate markets. Back in the second half of 2007 rising interest rates and falling property prices had already led to a mortgage crisis. For years mortgage lenders - especially in the United States - had handed out loans to borrowers with little or no equity, and as interest rates rose these loans could no longer be serviced. Many banks did not hold these poorly secured loans in their own books, but instead restructured them and passed them on to various groups of investors, including for example hedge funds. As part of a trend originating in the United States, hedge funds and banks began to get into liquidity problems. The capital market's proper functioning began to falter; banks lost confidence in one another and were scarcely willing to lend among themselves.
Hitherto sound banks had to rely on state assistance in order to stay afloat. The rescue packages put together by governments in the major industrial nations sought to defuse the crisis and restore the trust in the financial system that had been lost. The crisis on financial markets did, however, signal the end for the "investment bank" as a business model: in September the last two remaining institutions relinquished their special legal status and were transformed into commercial banks.
+++ Global crisis on financial markets dominates the year under review +++
The concerns about the stability of the banking system unleashed extraordinary turmoil on international capital markets. The leading stock indices shed up to 40% of their value in the year under review. Financials were especially hard hit by the stock market crash.
The economic climate around the world took a sharply darker turn as a consequence of the financial market crisis. The recession in the United States began to spill over to other countries; this was especially true of economic regions in which the financial sector and building industry contributed a large share of economic output. Yet the downturn was considerable even in countries whose economic expansion is crucially driven by exports. Only in threshold markets was it possible to boost output, although here too it flagged towards year-end.
+++ Insurance industry a major factor in economic stability+++
The German economy initially stayed on its growth track in the year under review despite the turmoil on capital markets. Particularly in the second half of the year, however, a plethora of bad news in connection with the difficult state of financial markets cast a heavy shadow over economic prospects. Eventually, as German financial institutions also got into difficulties over the course of the year, the federal government responded with the Financial Markets Stabilisation Act in October. In a further step to consolidate the German economy it also adopted a package of measures designed to safeguard jobs.
With just a few exceptions, the impact of the financial market crisis on the insurance industry was nowhere near comparable with the toll it took on the banking sector. Rather, against the backdrop of wide-ranging uncertainties it again emerged as an important factor in economic stability. In this context the Solvency II Directive Proposal of the European Commission is also taking on increasing significance: it is intended to provide Europe with risk-based regulatory legislation in order to secure the financial market and strengthen the continent's own role as a global location for the insurance business.