With an insured price tag of €4 billion to €5 billion (US$4.7 billion to $5.9 billion), economic losses from Germany’s recent floods are likely to be significantly higher, which highlights a sizable insurance “protection gap.”

This protection gap – or the proportion of an economic loss that is uninsured – could lead to increased business opportunities for insurers, especially as the awareness of climate change risks grow, according to several reports about Germany’s catastrophic floods, which occured July 12-18 after torrential rainfall caused by the storm “Bernd.”

While the German market is well insured against motor casualty and collision damage from the extreme weather in June and July, the same cannot be said about all private, commercial property, and household insurance, said S&P Global Ratings in its report published on July 19, which is titled “German P/C Insurers: Natural Catastrophe Risks Again Rise to the Fore.”

Indeed, S&P said, natural peril insurance not a standard feature of household insurance in Germany, which indicates a sizable protection gap for households.

More than 90% of residential building insurance policyholders are insured against hail and windstorm, but only 46% have comprehensive cover against elemental perils (such as heavy rain and floods), said AM Best, quoting Germany’s insurance industry association GDV (Gesamtverband der Versicherungswirtschaft).

“German insurers have been encouraging customers to extend their policies to cover additional natural hazards in recent years, but the insurance protection gap for this type of risk remains significant,” according to Moody’s Investors Services in a report titled “German floods will hit P/C insurers’ profit, highlighting climate change risk,” which was published on July 21.

“It is gratifying that almost half of the building owners now have protection from other natural hazards. But for the others, they should review and adjust their insurance coverage,” affirmed Jörg Asmussen, general manager of the GDV, in comments on the association’s website.

“Because natural peril insurance is not a standard feature of home insurance in Germany, we believe rising awareness of this top-up cover might represent a business opportunity that will nevertheless test insurers’ digital initiatives and customer service in 2021,” said S&P.

Moody’s speculated that demand for homeowners’ insurance that protects against climate risk is likely to increase but “offering such protection without substantial premium increases could be challenging for German insurers.”

“Awareness of the scope for losses from natural catastrophes has seen demand for catastrophe insurance gradually increase,” said AM Best in its report titled “German Insurers Well-Positioned to Respond to Natural Catastrophes in 2021,” published on July 21.

“However, for policyholders in highly exposed areas, such policy extensions are less affordable and most private households remain insufficiently covered against natural perils,” AM Best added.

Aon noted that there are significant regional differences in insurance take-up in Germany. “In the hardest-hit regions from the July 2021 floods, take-up rates include 47% in Nordrhein-Westfalen; and only 37% in Rheinland-Pfalz; 44% in Hessen; 38% in Bayern; but 94% in Baden-Württemberg,” according to Aon in a catastrophe report on Western & Central Europe Floods, published on July 19.

“This suggests that while there is likely to multi-billion-dollar industry loss in Germany from this event, the overall economic loss will be substantially higher,” Aon said.

“This reinforces the importance of flood protection improvements, earlier warnings to vulnerable populations, adaptation to more amplified weather phenomena, and increased measures to lower the protection gap,” the broker confirmed.

“The floods will affect various insurance business lines, with homeowners’ and household insurance hit hardest because of extensive damage to houses and their contents,” said Moody’s, adding that the speed and wide extent of the flooding hindered efforts to salvage valuables. “We also expect commercial lines to face property damage and business interruption claims, including some as a result of failing supply chains.”

The Role of Climate Change

“The event is widely viewed as a consequence of climate change, which increases the frequency and severity of extreme weather events,” even in regions historically less prone to this type of storm, Moody’s noted. “The German P/C industry already struggles to make a profit from homeowners’ insurance, and may find it challenging to protect homeowners against climate risk without significant price increases.”

Read more: Deadly Floods in China, Europe Send Stark Reminder of Climate Change Vulnerabilities

Aon noted that the tremendous volume of rainfall “was certainly consistent with what scientific research has shown as expected with the continued warming of the atmosphere and oceans.”

While climate change was not the direct cause of the July 12-18, Aon said, “it is another example of how more unusual heavy precipitation occurrences or stalled weather patterns are becoming more commonplace in a warming world.”

Earnings’ vs. Capital Events

S&P, Moody’s, AM Best and Fitch all agreed that German insurers will face much higher natural catastrophe claims in 2021, given June’s heavy rains and hailstorms, but they are currently earnings events, rather than capital events that could affect ratings.

According to the GDV, the storms in June already have resulted in about €1.7 billion ($2 billion) of claims. S&P noted that the average annual five-year (2015-2020) loss for natural catastrophes in Germany is about €2.8 billion ($3.3 billion), which makes it highly likely that natural catastrophe losses will be much higher in this year than in the past five years.

“Indeed, we believe insured catastrophe losses could be at least as high as in 2013, when the sector reported about €7.2 billion [$8.5 billion] in natural catastrophe losses stemming from severe floods and hail,” the ratings agency said.

“If the natural catastrophe losses reach €10 billion [$11.8 billion] for this year, the gross combined ratio will increase to about 102%, and if they hit €15 billion [$17.7 billion], that ratio could rise to about 109%,” said S&P.

Nevertheless, even if insured natural catastrophe losses exceed €15 billion, S&P maintains that losses for the German P/C sector and most rated insurers will likely remain an earnings event, not a ratings event.

“[W]e believe ratings for German insurers will remain stable based on their solid capital adequacy, reinsurance protection, and strong and improving underwriting property/casualty profitability,” S&P continued.

Moody’s expects the German P/C sector’s 2021 gross combined ratio (which are claims and costs as a percentage of premiums) to deteriorate to 96-99% from 90% in 2020. (A combined ratio above 100% indicates an underwriting loss).

Fitch Ratings agreed that the floods in Germany could add up to 5 percentage points to non-life insurers’ net combined ratios (net claims and expenses to net premiums). The sector’s good underlying profitability and extensive reinsurance cover will help to mitigate the impact of the losses, affirmed the ratings agency in a commentary published on July 19.

AM Best believes the German non-life segment generally has the ability to absorb high weather-related losses, “as it has shown the discipline in the past to price appropriately for such events.”

Further, Best’s report said, this year’s record weather-related losses in Germany “come after previous years of relatively benign claims experience.”

It will take some time before the ultimate claims bill is known, according to Moody’s. “GDV’s estimate of an insured loss of between €4 billion and €5 billion, published on 21 July, could make the flood the costliest ever for the German insurance industry,”

The final claims bill could be inflated by the shortage of construction labor and the fact that building expenses have risen by about 25% since 2015, explained Moody’s.

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 Journal.