The severe floods in Germany could add up to 5 percentage points to German non-life insurers’ net combined ratios (net claims and expenses to net premiums), according to Fitch Ratings.

The insured losses are likely to be Germany’s highest from a natural catastrophe event since widespread flooding in 2002, which led to claims of €4.5 billion, gross of reinsurance, said the commentary.

In most cases, Fitch does not expect the losses to burn through insurers’ earnings and materially affect capital, because they carry extensive reinsurance cover for natural catastrophes, which will limit the impact on combined ratios.

Moreover, the German non-life sector has good underlying profitability, which will mitigate the impact of natural catastrophe losses.

Consequently, the ratings agency does not anticipate rating actions as long the information received from insurers agrees with its view of the sector’s net losses.

Fitch explained that the flood claims from the recent floods will be driven by property damage under buildings insurance, followed by vehicle write-offs under motor insurance.

Above-Average Losses

Natural catastrophe claims in Germany are typically about €3 billion in a normal year, said Fitch. However, they are already set to significantly exceed this amount in 2021 due to the recent floods as well as about €1.7 billion of claims caused by heavy rains and hailstorms in June.

Factoring in typical levels of hailstorm claims this summer and storm-related claims this autumn and winter, Fitch expects 2021 to be one of the worst years so far this century for German natural catastrophe claims.

The sector’s combined ratio is typically below 100% (indicating an underwriting profit), even in years with high natural catastrophe losses. The most notable exception in recent times was in 2002, when Germany also experienced severe flooding and the sector’s underlying profitability was weaker than it is now, said Fitch.

The sector’s combined ratio for 2021 is likely to be above the 94% that Fitch forecast at the start of the year. “However, we still expect it to be below 100% given below-average claims from non-catastrophe insurance so far this year, which typically drives insurers’ overall profitability.”

Fitch noted that risk exposures and reinsurance cover for the flood losses will vary among insurers. “[I]nsurers with higher retained exposures could face more significant losses, particularly if their exposures are concentrated in the worst-affected regions.”

As Germany’s public sector insurers have a greater focus on buildings insurance, they are typically more exposed to natural catastrophe losses, said the Fitch commentary.

“They also have more concentrated gross risk exposures as each insurer tends to focus on a given region,” it continued. “However, public sector insurers tend to buy extensive reinsurance cover to protect their balance sheets, reflecting their geographically concentrated exposures.”

Photograph: Houses and cars in the Ahr valley in the Walporzheim district are destroyed in Bad Neuenahr-Ahrweiler, Germany, on Saturday, July 17, 2021. Days of heavy rain in Western Europe turned normally minor rivers and streets into raging torrents and caused the disastrous flooding that swept away cars, engulfed homes and trapped residents. Photo credit: Thomas Frey/dpa via AP.

*This story ran previously in our sister publication Insurance Jounal.