Germany’s nat cat insurance coverage delayed due to political disagreement: AM Best

According to an AM Best commentary, the debate over Germany’s compulsory natural catastrophe coverage is hindered by the absence of political agreement between federal states and the central government.

AM Best’s report titled, “Political Consensus the Missing Ingredient for German Natural Catastrophe Solution,” highlights that, following the 2021 flooding in Southern Germany, there have been renewed calls for a state-backed system to provide comprehensive natural hazard insurance protection.

This would cover damage from flooding, backwater, earthquakes and snow pressure, similar to systems in other major European economies.

The report examines how proposals to address the protection gap caused by flooding have exposed significant divisions between the insurance industry and politicians, and among re/insurers themselves.

The divide arises because the responsibility for responding to storms and flooding falls on individual German states, which has led to natural catastrophe insurance coverage being a lower priority on the German Federal government’s agenda.

This friction has led some states to take unilateral action by implementing op-out coverage instead of the traditional opt-in, though this approach varies across the country.

At the same time, several German states and insurers are calling for a “compulsory model,” similar to the French system, which would involve creating a state-backed reinsurer. However, this proposal faces opposition from the Federal government level, some larger insurers, and the German Insurance Association, Gesamtverband der Versicherer (GDV).

The concerns about the compulsory model stem from the belief that premiums would not be calculated based on a risk and that there would be no contractually defined trigger for pay-outs.

The opposition supports a broader implementation of the opt-out approach; however, a corresponding motion was rejected in the Bundestag in June 2024.

Proponents of the compulsory scheme argue that opt-out options would only increase insurance penetration to 80%, which they consider insufficient. In contrast, the GDV believes that achieving a 50% increase over the current level would be a significant success.

The penetration of comprehensive natural catastrophe insurance coverage in Germany remains relatively modest, despite recent increases. According to GDV, while over 90% of policyholders with residential building insurance are covered against hail and windstorms, only 50% have comprehensive coverage against elemental perils, up from 19% in 2012.

Demand for comprehensive coverage rose following the summer 2021 floods; however, uptake has since declined, leaving the protection gap high.

AM Best notes that there is sufficient capacity available from global reinsurers and the capital markets to support these exposures if a scheme with compulsory features is introduced.

Aon Reinsurance Solutions’ analysis estimates that a compulsory insurance scheme introduced in Germany for 1 January, 2024, would have required approximately €10 billion in risk capital, based on flood exposures.

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