There is also an insurance gap in Germany

There is also an insurance gap in Germany

Dhe insurance industry is currently struggling with two things. On the one hand, the damage caused by natural disasters, such as storms or floods, are constantly increasing. On the other hand, the galloping inflation makes it more and more expensive to replace the damage.

“We have to have price stability again, otherwise no sustainable growth is possible,” says Jérôme Jean Haegeli, chief economist at reinsurer Swiss Re, in an interview with the FAZ

The past year was the second in a row in which insured losses exceeded 100 billion dollars, according to calculations by Swiss Re , one of the leading companies in the insurance industry. In 2022, insured losses caused by natural catastrophes totaled 125 billion dollars, which was 4 billion dollars more than a year earlier. For comparison, the ten-year average is $81 billion.

Inflation increases the cost of damage

Inflation plays a significant role in this development. In 2022, the annual average was 7 percent in the industrialized countries and 9 percent in the emerging countries. Swiss Re argues that rising prices have made buildings, vehicles and other insurable assets more expensive in nominal terms, thereby also driving up insurance claims from natural catastrophes.

“The economic storm is not yet over and given inflationary pressures, interest rates are likely to have to rise further. Since this leads to higher financing costs, capacity providers are likely to remain cautious for various reasons,” says Haegeli.

No bank run on insurers

However, the chief economist at Swiss Re denies that insurers are just as stressed as banks: “It is a perfect storm of sharply increased losses caused by natural catastrophes coupled with record-high inflation. But the perfect storm can be designed. There will be no bank runs on insurers,” he is convinced.

Of course, insurers who have to invest premiums with as high a return as possible are also exposed to the turmoil on the financial market. However, most investments are made in safe government bonds. The fact that insurers also hold AT1 bonds from banks, such as those from Credit Suisse that may now be worthless, is generally unusual in the industry.

premiums increase

The design is primarily based on the price. – every year in December and January when the new premiums are negotiated. “We have seen very strong price increases, and these were also necessary,” says Haegeli. He is convinced that if inflation falls, insurance prices will also level off.

This also harbors the risk that consumers will save on insurance. But according to Haegeli, this has been a reality for a long time: “There is an insurance gap of 60 percent globally,” which means only 40 percent of damage is insured, “the rate in Germany is slightly better at 55 to 60 percent,” he says. “In the US, for example, only one in six people is insured against flood damage. However, half are of the opinion that they are adequately insured,” adds the Swiss Re manager.

In Germany, for example, less than 30 percent of flood damage was actually insured in 2021, Haegeli adds. “The biggest risk for consumers is not being insured, or not being insured enough,” warns Swiss Re’s chief economist.

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