German insurers able to back €10bn cat scheme: AM Best

The German insurance market has adequate capacity to back a compulsory natural hazards scheme if it were introduced, AM Best has said.

But the political will to make this happen appears to have petered out again after reaching a high earlier this year following more catastrophic floods in southern Germany.

The ratings agency pointed out that analysis from Aon Reinsurance Solutions has suggested that if a compulsory insurance scheme were introduced in Germany at the start of the year, it would have required risk capital of around €10bn, based on flood exposures.

“AM Best believes there is sufficient capacity available, both from global reinsurers and the capital markets, to take on these exposures should a scheme with compulsory features eventually be introduced one day,” it said.

“That will only happen if all the parties – insurers, homeowners, actuaries, civil servants and politicians – come to the table with an appetite for a solution,” added AM Best.

The fact is that such a consensus is proving difficult to achieve for supporters of the mandatory approach facing particularly strong opposition from the insurance industry.

“Proposals for a solution to reduce the protection gap specifically caused by flooding have exposed some sharp divisions: between the insurance industry and politicians, and among (re)insurers themselves,” noted AM Best.

One of the complications for the plan is the state-federal divide in German politics.

“Because much of the responsibility for responding to the aftermath of storms and flooding typically resides with individual German states, natural catastrophe insurance has not been high on the German Federal government’s agenda. It is a much more pressing concern for the individual states – particularly those covering regions that typically experience frequent or severe events,” stated AM Best.

“Some states are already taking unilateral action and have moved from a system in which policyholders must opt in to flood cover, to one in which they must opt out from such protection, but the approach is not consistent across the country,” it added.

At the same time, several German states – and a number of insurers – have asked for a so-called “compulsory model”, which would emulate the French natural catastrophe system and see the creation of a state-backed reinsurer.

“That suggestion is opposed at the Federal government level, but also by some larger insurers and by the GDV, which has expressed concerns that premiums under the compulsory model would not be calculated on a risk-based basis and there would be no contractually defined trigger for a payout,” explained AM Best.

Under the French-style model, a commission would decide whether or not an event falls under the state insurance scheme.

But as AM Best explained, at least one federal minister has also expressed concern that a compulsory scheme might lead to unrealistic expectations that flood covers would be available at cheaper rates.

“The GDV, and some Federal ministers, are backing a wider-spread implementation of the ‘opt-out’ approach already in place in some states. However, a corresponding motion was voted down in the Bundestag in June 2024,” said the ratings agency.

“Supporters of the compulsory scheme believe the opt-out options would only grow insurance penetration to 80%, which they say is not sufficient. The GDV, on the other hand, believes that figure – up from the current 50% level – would represent a significant success,” added AM Best.

The GDV and other industry bodies say that the focus should really be on loss prevention and risk mitigation, not transfer.

The German actuarial association, Deutsche Aktuarvereinigung (DAV), has demanded a more proactive approach from government on legislation around building codes and re-building permits, as well as making risk exposure information more accessible to the public.

“According to the DAV, the insurability of natural hazards cannot be solved by compulsory insurance alone. Investment into a climate-change friendly infrastructure to prevent and limit the effects of natural hazards and the promotion of individual preventive measures play just as important a role in a nationwide natural hazard insurance as effective accumulation compensation (possibly also covered by the state) and social policy measures,” pointed out AM Best.