Property and income insurance
Natural hazards dominate
The property insurance market is currently dominated by climate change and the increasing number of severe weather events that go hand in hand with it. Nevertheless, companies can hope for a market environment that is stabilizing.
Market situation and review
At the beginning of this year, insurers published their annual balance sheets for 2023 and presented how premium income and claims had developed. Even though positive results are often presented overall, insurers make it clear that the overall result is clouded by an unsatisfactory business result in property insurance. Thus, the situation seems to have changed little compared to previous years.
Last year's claims situation
2023 was marked by many individual losses due to fire or explosions, which had a significant impact on insurers' loss-cost ratios. Major losses in the metal forming industry and in surface treatment were so significant that many insurers no longer want to underwrite risks from these industrial sectors in the future, or only at significantly different conditions. Although there were no major natural hazard events in Germany last year, the overall level of such losses remains high.
In the international arena, the earthquake that hit Turkey and Syria in February 2023 stands out clearly. Floods, storms and/or hurricanes have once again led to a high level of losses from natural hazards worldwide. The losses abroad, which are not included in the statistics of the German Insurance Association (GDV) are not included, are of crucial importance for the business development of internationally active risk carriers and, in particular, for their reinsurers.
The German insurance industry is calculating a combined loss ratio (property, trade/industry, agriculture) of 107 percent for 2023, which is once again well above 100 percent.
Floods dominate the current year
The claims situation in the current year is characterized by a number of extreme flood events. The floods in southern Germany at the beginning of June damaged many residential buildings as well as numerous businesses. For the public-law insurers in these areas in particular, this natural event will dominate the business result for the current year. The GDV assumes that the risk carriers will face losses in the low billions. Compared to the natural disaster caused by the low-pressure system “Bernd” in 2021, which cost around nine billion euros and was by far the largest accumulation loss event in the history of the German insurance industry, the current floods appear to be manageable overall. Nevertheless, future effects on prices and capacities in the area of natural hazard insurance are to be expected.
These circumstances are leading to a renewed and intensified discussion about compulsory insurance against natural hazards in the private sector.
Regulation and its impact on companies
In order to counteract climate change and its associated effects, European legislation has introduced, in particular, mandatory disclosure requirements for companies to disclose certain information about their sustainability activities. Certain public-interest entities in the EU have been required to report on their sustainability for several years. This is regulated by the Non-Financial Reporting Directive (NFRD), which has been in force since 2014. This should enable stakeholders to better assess the contribution of companies to sustainability.
The EU taxonomy and the Corporate Sustainability Reporting Directive (CSRD) require further companies not only to report on sustainability activities, but also to explain what risks will arise if temperatures continue to rise, how the risk situation is assessed in the various scenarios, and what measures are being taken to counter them.
From 2025, companies that meet the following criteria will have to submit a sustainability report and a risk assessment in a prescribed reporting standard:
listed companies (except listed micro-enterprises), companies with more than 250 employees, a balance sheet total of more than 25 million euros and net sales of more than 50 million euros, if at least two of these three criteria are met, and other companies that are considered relevant to the public interest by national authorities.
When the CSRD reporting requirement takes effect, around 50,000 companies throughout the EU will have to provide a detailed account of their sustainable business practices.
Around 15,000 companies will be affected in Germany alone. In 2026, capital-market-oriented small and medium-sized enterprises (SMEs) are to follow, unless they make use of the option of deferring until 2028. The companies' activities will certainly influence the insurance industry's risk assumption at least in the medium term. The current effects of climate change are already influencing treaty conditions and capacities.
Within the Ecclesia Group, deas is able to support its customers with these disclosure requirements as well. Depending on requirements, modular components can be provided to support companies with the upcoming obligations as needed.
Market development 2024/2025
An average of the insurance industry in the combined loss-cost ratio means that some insurers ended 2023 with a positive balance. However, these risk carriers point out that the manageable surpluses serve as a reserve for future years. This is a clear indication that falling premiums are not to be expected.
In addition to the increases in premium rates, inflation-related increases in values also had to be taken into account in property insurance when adjusting the sums insured, which then meant another linear increase of over ten percent in premiums. Price increases have decreased and are currently returning to the long-term average of less than three percent price increases for buildings and technical equipment, as can be seen from the publications of the Federal Statistical Office.
This should also help the other parameters to normalize again. The increase in average claims expenditures should slow, which will lead to an overall stabilization. However, bottlenecks in the supply of materials can still be seen in some cases, causing prices to rise more sharply than the average index would suggest in some areas.
The situation on the reinsurance market has an influence
In the last two years in particular, reinsurers have raised prices dramatically, enabling primary insurers to significantly increase their retention – also to be able to cushion the impact of price increases. The higher retention leads to increased capital investment for primary insurers, which will be reflected in the premium level. Sooner or later, the price increases on the reinsurance market will be passed on to the primary insurers. In this respect, no restraint is to be expected from these market participants either, and the high premium level will continue. In particular, a further tightening of reinsurance conditions can be expected for natural hazards.
Measures to prevent or improve the risk situation
As in previous years, insurance companies are focusing on promoting or at least recommending preventive measures. Measures to avoid or reduce losses are now essential prerequisites for receiving offers from insurers. deas continues to perceive that risk carriers only make their capacities available if companies actively participate in risk minimization. This applies in particular to companies where insurers identify a higher risk.
As part of risk engineering, deas prepares the companies for the requirements, advises them on creating an overall concept and plays an active role in the decision-making process for prioritizing measures. With good planning and active implementation of the respective steps, it is possible to win over risk carriers for customers in the long term. Companies that act with foresight will benefit from competition in the insurance industry.
Conclusion
There are currently no signs of any change in the market situation. It can be assumed that the risk carriers will offer the renewal of insurance contracts largely at unchanged conditions. Exceptions will be made where a higher claims burden is foreseeable, where the type of business carries a higher loss potential, or where companies do not actively participate in risk minimization. In these cases, further increases in premiums, deductibles and a capacity shortage can be expected. A reduction in premiums will only be possible if the risk is significantly improved by protective measures for the insurer.
Your deas solution
What particularly distinguishes us is our effective and practice-oriented advice in risk engineering. In addition, we leverage the purchasing power of the largest broker in the German market. Thanks to our strong partner network, we also have access to the London insurance market. In addition, we can draw on the expertise of our own reinsurance broker Ecclesia Re, including in the area of alternative risk transfer and on international reinsurance markets. All this enables us to take bold action in meeting your challenges in order to achieve the best for you.
Thomas Hergarten