Flooding disaster in Germany – another wake-up call for the insurance industry
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The tragic events in North Rhine-Westphalia and Rhineland-Palatinate that were unleashed by the area of low pressure "Bernd", leading to the loss of more than 170 lives, are still fresh in all our minds and continue to dominate the daily news. As you might expect, a catastrophic event such as this had galvanised politicians in Germany from across the political spectrum – with the link that was immediately made to climate change playing its part – and the media was clearly reflecting this picture.
The German insurance industry association publishes estimated figures for total insured losses (currently EUR 8.2 billion for Germany as a whole), regulates losses and notes the lack of willingness on the part of customers to insure themselves against natural hazards (less than 50% of those affected had appropriate insurance cover). Beyond that, however, the association is simply pleased to find in the media a positive response that by good fortune pushes the reputational disaster surrounding insurance for company closures over the last year a little further into the background. But are we living up to our overall social responsibility as an industry?
The insurance industry stands ready to insure almost every building in Germany against flooding. It wants to do this through the private sector, based on its own regulations and its own risk assessments and price calculations – homeowners are free to decide whether or not they want to take out insurance. It believes that the state should take care of the appropriate preventative measures but that it should not open the coffers after each flood and use taxpayer money to provide financial support for the uninsured, thereby creating false incentives.
After many years of this approach, insurance density for natural hazards throughout Germany is stagnating at just under 50%. If you look a little closer at the details, however, it becomes apparent that insurance density in the new business of insurers is significantly higher (70% and higher), so the rub is in the portfolio. Progress is stalling here, because most insurers are afraid of making changes to their old residential housing policies: If natural hazard cover were to be included, the premium would inevitably have to increase, in many cases quite significantly depending on the extent of the flood risk. This is a horror scenario for many working in insurance sales, since unwelcome competitors could take this opportunity to hunt down market share.
But does the insurance industry really want to get bogged down in the details of making changes to coverage that will increase insurance density for natural hazards in increments of one percentage point each year? And after major events of two percentage points in a year? So how can we free ourselves from these shackles? What is the vision for our industry?
There is no doubt that global climate change has altered the probability of certain weather phenomena occurring, thereby increasing the risk of such events. But "risk" is precisely where our bread and butter is – it is our core competency. Insurers and reinsurers understand "risk" – so why are we not able to win over society and politicians?
The insurance industry continues to take a defensive stance, tending to focus more on explaining why certain things don't work than on offering solutions for making things more feasible and pursuing new avenues. Certainly when it comes to the current debate about compulsory insurance, there is more than enough expertise within insurance companies to set out some potential framework conditions: unchanged or enhanced prevention, restructuring of building regulations, risk-based premium calculation instead of a standard premium, transparency about risk exposure etc, the potential role of the state, services from insurance companies.
This is not a plea for compulsory natural hazards insurance in the same vein as compulsory third-party liability insurance for drivers. The insurance industry in Germany is in a position to provide comprehensive coverage for natural hazards – regardless of whether it happens entirely privately or in collaboration with the state.
But it is a wake-up call for us to go on the offensive: As an industry we must challenge ourselves to do everything possible to make insurance gaps impossible looking ahead. Helping people in their most difficult moments and safeguarding national economies even in times of crisis – this is a vision that lives up to our overall responsibility. Insurance density of 50% is simply not enough to make this vision a reality.