Pressure builds on German state to introduce compulsory nat cat cover

The German government is under pressure from a rising number of federal states and now, reportedly, the Federal Council (Bundesrat) that represents the 16 states, to introduce mandatory natural hazard insurance.

The debate over mandatory nat cat cover for households has raged in Germany since the catastrophic floods of 2021.

North Rhine-Westphalia’s minister president Hendrik Wüst last week reportedly reminded the Bundesrat of the huge losses and deaths caused by the 2021 floods, which he said showed Germany must become “more resilient”.

The state premiers agreed that a nationwide compulsory insurance programme for natural hazard damage is now needed, Wüst reportedly said.

German chancellor Olaf Scholz said in June last year that the matter would be addressed, pointed out Wüst. “To date, unfortunately, the federal government has not presented a viable solution,” said the minister president.

According to news agency AFP, Wüst added that there is an urgent need for action because the states and federal government must ensure that no one faces absolute ruin when the next disaster hits.

Wüst pointed out that only half of all private German homeowners have natural hazard insurance. “That is simply too little,” he said.

Saxony-Anhalt’s deputy minister president, Armin Willingmann, said he doesn’t think that Germany will manage to “significantly increase” voluntary take up of nat cat insurance cover in the foreseeable future.

It is thought that the federal German government will now be obliged to submit a draft law to the Bundestag.

The insurance industry represented by the German Insurance Association (GDV) has to date campaigned to avoid compulsory natural hazard cover. But individual insurance companies such as Munich-based mutual HUK-Coburg are pushing ahead regardless. The insurer is no longer prepared to insure buildings without a huge deductible unless basic cover against natural hazards is taken out.

“As a major insurer for private households, we want to meet our social responsibility and protect our customers from the financial consequences of extreme weather events,” said CEO Jörg Rheinländer.

While German insurance professionals represented by the GDV and the buyers’ association GVNW may not support the concept of compulsory cover and would prefer to see a focus on loss prevention, risk management and education, the majority of German citizens actually favour the compulsory route.

Last June, research among 4,000 German private households by state-owned development bank KFW for its KFW Energy Transition Barometer 2022 revealed that 68% of respondents said they are impacted by climate change and 63% favour compulsory insurance for property owners.

“One way to address risks from extreme weather events is to take out insurance against natural hazards such as floods and inundations. But current data from the German insurance association shows that only around half the buildings in Germany are insured against these hazards. Given the low rate of insurance coverage and the high financial risks to individuals, the idea of compulsory insurance for property owners against losses from natural disasters is repeatedly being flagged,” explained KFW Research at the time.

KFW said there is a split, though, over who people think should bear any loss in the absence of coverage.

More than half of the households who objected to compulsory cover (54%) said the state should pay for any loss. But a large share of respondents (46%) believe that affected parties should bear any loss themselves.

“Majorities even differed from one population group to another. Whereas low-income households clearly advocated for the state to step in (67%), the majority of those on higher incomes (57%) responded that affected parties should bear the loss themselves. Compulsory insurance would ease the tension in this fraught field,” said KFW.

“A broad majority of households in Germany are receptive to compulsory insurance against natural hazards. So it appears to be politically viable. It is also an important contribution to protecting the assets of large sections of the population amid increasing extreme weather events. But among the population there is significantly more controversy over alternatives – whether to have losses covered by the state or by those affected,” commented Fritzi Köhler-Geib, chief economist at KfW.

“Insurance policies must be designed in a way that provides the right incentives for risk avoidance. And they must offer a viable solution for households on which insurance premiums would put a particular strain,” added Köhler-Geib.

The KFW study was backed up by similar research carried out by the the Leibniz Centre for European Economic Research (ZEW) in Mannheim, which was also published last June.

Based on a survey of 5,000 German households carried out in 2020 and again in 2022, it found that more than two-thirds support the introduction of mandatory insurance against flood damages and other natural hazards.

It said that support has risen slightly following the flood disaster in 2021.

“A cleverly designed mandatory insurance scheme could significantly contribute to a better protection of the population without abandoning market principles,” said Daniel Osberghaus, expert on climate adaptation and flood prevention at ZEW Mannheim and author of the ZEW policy brief. “Moreover, there are many reasons to replace the current practice of the state stepping in with ad hoc aid.”

“In the event of an acute disaster, the provision of state aid for uninsured victims is essential. In the long run, however, they set the wrong incentives and discourage people from taking more preventive measures,” added Osberghaus.