No recovery for property insurance expected
No recovery for property insurance expected
While the transition to a soft market phase is lacking sustainable positive results, there will be no lack of surprises in the 2022 industrial property insurance market. Insurers’ convergence in risk assessment and risk selection is being accompanied by unprecedented divergence in pricing. A changing risk landscape is giving rise to diversity and complexity of coverage-related issues that will – and must – play a weighty part in policy renewal, alongside the question of the development of rates and capacities.
The third year of restructuring by insurers has ended in Germany with a combined ratio of 177 per cent in the market, the highest figure so far in this millennium (see chart 1). The reasons are manifold: in addition to major fire damage, it is mainly the flash flooding caused by storm Bernd which accounted for up to half of all claims expenditure for some insurers.
The hitherto costliest natural hazard event in Germany has left its mark on the insurance and reinsurance markets (see chart 2). In light of the extraordinary magnitude and intensity of losses, insurers are now focussing on recurrence intervals and what impact such cumulative events could have in future. The assessment of such exposure will also determine to what extent and in what form insurers will be formulating their pricing and underwriting concepts in 2022 and beyond.
The increase in claims expenditure caused by natural hazards associated with climate change is also becoming evident globally. Over the past five years, the threshold of USD100bn has been exceeded four times worldwide (see chart 3). In the ten years before that, this happened just once. What is striking are the “secondary natural hazards” such as drought, forest fires and flooding which currently make up the lion’s share. This trend is expected to continue in the future.
Combined ratio in property insurance
from 2005 to 2022
Source: GDV sector statistics for direct business in Germany, rounded premiums and ratios
Anyone hoping that a transparent and uniform property insurance market will bring about recovery in negotiations with insurers is bound to be disappointed (for now). For the time being, no such development is expected to occur. With the transition to a soft market phase lacking sustainable positive results, strict risk assessment and risk selection will continue to prevail. While some insurers are significantly reducing their demand for additional premiums from customers with no claims history and, in some cases, are willing to continue their policies unchanged if the claims and risk situation is positive, other insurers look set to continue their restructuring, something which will hit the middle market segment in particular even harder than before. Premium forecasts will be influenced even more heavily than before by the segment in question and the specific insurers in the syndicate, and will also be determined by rising insurance amounts caused by inflation. Whether there is any premium level which would have consequences for the fate of a given policy will depend on the actions of new, emerging competitors.
Future developments remain exciting, especially where customers have worked consistently to improve their risk and are thus able to exploit the price divergence in the market to their advantage.
For insurers, portfolio protection will once again take on greater importance in terms of restructuring – prices are becoming less volatile and implementation pressure is waning. Nevertheless, the industrial property insurance market remains highly sensitive to losses and earnings.
In view of the insurance market environment and insurers’ underwriting behaviour, customers will still be looking for alternative risk-financing elements in the future. On this point, the courage to embrace change may aid liberation from the market cycle.
Along with a sustained hard market phase, the speed of change in the risk landscape is accelerating rapidly. What is striking is that every single associated challenge is affecting insurers and customers alike. The upward trend in losses due to climate-related hazards is just one part of the picture, with the flash flooding caused by storm Bernd serving as a vivid reminder that natural hazards, in particular heavy rainfall and flooding, will also play an ever more dominant role in Europe in the future, even if the US remains the loss-event hot spot for natural hazards of all kinds.
A new consideration is the decreasing extent of globalisation, prompting a change in thinking by governments and companies. In addition to the COVID-19 lockdowns, the war in Ukraine not only presents immediate challenges but is also the cause of other current issues such as inflation and supply chain problems. This needs to be borne in mind during contract renewals, as any sound solution will have consequences for cover.
The same applies to further discussion points stemming from the war in Ukraine, culminating in questions of how the environmental and social pillars can be harmonised and reconciled in terms of ESG, to what extent insurance cover for countries such as Russia can still be insured at all, and what risks companies might face in the event of a possible halt to gas supplies. Discussions with insurers on this issue lie ahead.
The market environment remains challenging. The demands on the quality of risk advice and companies’ own risk management will grow steadily in the future and must ensure that all developments be examined in great depth from a business survival perspective.
Claims expenditure caused by natural hazards in Germany
“As if” calculation top 10 with 100% insurance density in 2020 for accumulated property loss events (2002-2021)
Source: GDV; * Forecast, December 2021
Claims expenditure caused by natural hazards worldwide
from 2015 to 2021
Source: Aon Catastrophe Insight, 6 January 2022