Swiss Reinsurance Company (Swiss Re)
By Stefan Reese
The likelihood of experiencing extreme weather events is increasing in Germany, particularly events such as heat waves, droughts, heavy rainfall and hail. Hurricanes and tornadoes are also becoming more frequent. Private property owners are most at risk but it is possible to insure against these weather events thanks to some tried-and-tested as well as new ideas.
As climate change takes its toll, the frequency and intensity of extreme weather events is set to increase but new types of risk are expected too. For example, global warming and the accompanying rise in the frequency of heat waves is often responsible for structural damage to buildings. Long, hot summers dry out the ground and cause it to contract, resulting in settlement that can lead to cracks or even the complete destruction of a building. More heavy rainfall leads to damage from living organisms by encouraging the growth of fungi or prevalence of rot. These changing conditions force property owners to consider additional cooling requirements and the need for air conditioning systems. The risks above also cause buildings to age faster and require maintenance more frequently. Alternative building materials, climate-specific structural adjustments and other preventative measures are necessary to combat these issues. Older buildings in particular require adjustments to their water drainage systems to cope with heavy rainfall.
"Many citizens still assume that state aid will be available after extreme weather events. This reliance on the state is one of the reasons why only 45% of German homeowners have natural catastrophe insurance."
Many citizens still assume that state aid will be available after extreme weather events. This reliance on the state is one of the reasons why only 45% of German homeowners have natural catastrophe insurance. Another reason is a lack of awareness that standard building contracts often only cover damage caused by storms and hail, rather than heavy rain and flooding. Some homeowners are unwilling to pay what they believe is a high premium for comprehensive natural catastrophe insurance, even though this type of cover is available for less than EUR 100 per year. Even a price of several hundred euro per year is not a huge amount to protect a house worth several hundred thousand euro. Other homeowners do not believe that they are at risk. However, a study conducted by the German Insurance Association (GDV) and the German Weather Service confirms that heavy rain can affect anyone. Despite reports to the contrary in the media, even residential buildings in highly exposed areas can be covered by natural catastrophe insurance.
Policymakers have already started to rethink what the state is able to offer. Back in 2011, the state government of Saxony decided it would no longer provide any state aid for flood damage because insurance can be acquired for this risk. Bavaria followed suit on 1 July 2019 and has cut emergency aid for damage caused by natural catastrophes. Policymakers now expect German citizens to make their own arrangements and property owners to insure their buildings and household contents accordingly. Almost all of the federal states in Germany have launched information campaigns about natural catastrophe insurance with support from the GDV to encourage German citizens to take responsibility for this issue.
With these circumstances in mind, it's clear that homeowners must make sure that they are covered – whether they take out standard cover for damage from natural catastrophes or purchase a modular product, such as cover that only insures against heavy rainfall. Alternatively, homeowners can choose a completely new, innovative product.
Residential building insurance is an insurance class that has faced and is still facing a variety of challenges.
German homeowners can insure their properties against various extreme weather events, such as flooding, heavy rainfall, earthquakes or heavy snowfall, by taking out natural catastrophe insurance. Almost all buildings in Germany can be insured against damage caused by flooding and heavy rain; even homes in especially vulnerable areas can be insured.
Premiums inevitably require some adjustments due to the rising number of claims, increasing repair costs, outdated building structures and materials, higher property values, more technology and electronic possessions, and more frequent severe storms. For example, the total cost of damage and the average cost of mains water damage has almost tripledin the last 20 years. However, buildings insurance is not a profitable business so substantial and expensive damage is a cause for concern for residential building insurance providers as well as customers.
The significance of residential building insurance can no longer be overstated – it is an indispensable private insurance option for property owners. For example, insurance cover for storm or fire damage allows homeowners to rebuild their property after an extreme weather event, which is important considering that a house is often a nest egg for retirement and, more often than not, constitutes a family's entire assets.
Traditional insurers are now sharing the market with several new and innovative digital providers that are responding to the changing customer needs of the digital generation. One example of this is the partnership between iptiQ and Domcura, which has resulted in a fast and simple insurance solution this year: an innovative questionnaire that replaces a lengthy risk assessment with just eight easy-to-understand questions.
Climate change alters the risk landscape and has an impact on all types of insurance, including property, agriculture, life and health insurance. The EU estimates that the annual, global cost of climate change will be between 600 and 2 500 billion euro by the year 2080. Sustainability is therefore also becoming increasingly important in the insurance industry. There is a great demand for sustainable insurance and sustainable insurance products (green products). Incentives for prevention will also gain importance in the years to come.
The insurance industry has the task of protecting social assets at the same time as using its position as a major investor. In this respect, there is an opportunity to promote green and sustainable technologies. Climate change requires a comprehensive and integrated approach to risk management, and risk transfer is only one of the building blocks. To face the challenges ahead holistically, greater cooperation and more partnerships across all industries and levels, including politics, will be required in the future.
In addition, the insurance industry must make good use of its role in these areas to raise awareness of risk within society and to act as an innovator. Climate change entails not only risks, but also plenty of opportunities and potential for the insurance industry.
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