The German Actuarial Association proposes a concerted solution for insurability of natural hazards

October 11, 2023 – The German Actuarial Association proposes a concerted solution consisting of prevention, private insurance and accumulation loss coverage in the event of a disaster in order to achieve sufficient long-term insurability of natural hazards. One aspect could be the elimination of insurance tax.

He intervened in the debate about the introduction of compulsory natural hazard insurance German Actuarial Association eV (DAV) with an approach that has so far not been discussed much. The actuaries are calling for insurance tax on natural hazard insurance to be abolished. This would reduce the burden on consumers, according to a DAV statement.

Max Happacher (Bild: DAV)

“The elimination of insurance tax has its role models in health, pension or life insurance, for example. This provides customers with an incentive to take out a contract in the event of a voluntary option,” says DAV Chairman Dr. Max Happacher quotes.

Especially in the case of compulsory insurance, abolition is necessary for reasons of acceptance. Because the tax makes insurance significantly more expensive. “I see it as critical that the state generates additional income through a mandatory solution,” said Happacher.

Compulsory insurance when taking out a loan

Another aspect could be the protection of third parties. “This particularly includes lending banks,” says Happacher. A conceivable alternative to general compulsory insurance is compulsory insurance when taking out a loan to finance construction in order to cover the risks of default.

A corresponding change in the law is necessary for this. This represents a smaller intervention than general compulsory insurance and would also lead to more insurance coverage.

It is important that the price is commensurate with the risk. In height and in terms of its geographical differentiation.

Dr. Max Happacher, DAV chairman

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Price appropriate to the risk

The professional representation also points out mathematical connections. Happacher emphasizes that an actuarially accurate calculation is always associated with a risk-appropriate price. “No matter how you structure your natural hazard insurance: it is important that the price is appropriate to the risk. In height and in terms of its geographical differentiation,” he says.

The annual premiums for natural hazard insurance for a single-family home are currently usually in the low three-digit range. In particularly risky situations, they quickly increase many times over.

If a capped price for high-risk situations were to be considered in the event of a mandatory solution or in general, the DAV says the premiums would have to rise overall. It would be significantly more expensive for all other insured people. As a result, buildings in risk areas would be subsidized and those in non-critical locations would be punished, it is said.

One way to deal with very high premiums would be to have correspondingly higher deductibles. This would allow individual premiums to be significantly reduced. According to the mathematicians, the insurance coverage then serves to provide basic livelihood security, not 100 percent protection against all losses.

Concerted solution

The actuaries advocate “a concerted solution of prevention, private insurance and accumulation loss coverage in the event of a catastrophe”. Only this can make a sufficient contribution to the long-term insurability of natural hazards. It is reported that mere compulsory insurance is not enough in any case.

Stronger government requirements for construction are essential in order to regulate new settlement in endangered and highly endangered areas. In addition, state prevention measures must be maintained and improved, including the expansion of dikes, wastewater systems and early warning systems.

Matthias Land (Image: DAV)

Promoting individual preventive services from consumers and companies also plays a role. According to the professional representation, this should be countered with information and, if necessary, subsidies for structural changes and their maintenance.

Capital-intensive Risk

A major challenge for insurers is that natural disasters often occur cumulatively in an area and usually cause exceptionally high costs. This circumstance resulting from the combination of high amounts of damage and cumulative losses means a capital-intensive risk for insurers.

According to the DAV, this would have an impact, especially in the case of mandatory insurance being discussed. It is reported that if insurance companies were forced to conclude contracts as part of compulsory insurance, additional instruments would be needed to make the catastrophic accumulation event manageable for insurers.

“So-called accumulation loss insurance, for example through reinsurers, the capital markets, so-called cat bonds, or state-organized pooling, would come into play if an entire area was affected by numerous, large losses and a defined amount of damage was exceeded,” says Happacher.

We run the risk that natural damage will become uninsurable in the future.

Dr. Matthias Land, board member and chairman of the DAV’s non-life insurance committee

Withdrawal from the market

“If major loss events, such as the flood disaster in the Ahr Valley caused by the ‘Bernd’ depression, occur more frequently due to climate change and each of these events significantly erodes the capital stock, we run the risk that natural disasters will become uninsurable in the future and the first insurance companies will be out of business withdraw from this market,” says Dr. Matthias Land, board member and chairman of the DAV’s non-life insurance committee.

This is already the case in the USA today. The insurance industry only has a limited amount of capital to deal with claims.

One of these is expected to take place in the fall Chancellor Olaf Scholz The federal-state working group set up by the SPD will begin its work on compulsory insurance against natural hazards.