Frankfurt, Munich Persistently high inflation is becoming a huge cost driver for insurers and their clients. It is now becoming apparent that the significant increase in procurement and raw material prices has markedly increased the cost of compensation for damages. The result: customers pay significantly more in some areas.
“We see that the premiums have adjusted to the cost dynamics,” said Mario Greco, CEO of the Zurich-based insurer, the Handelsblatt. According to the head of one of the world’s largest insurers, this trend is likely to continue this year and next.
Last year’s accounts already brought insurers a significant negative in several places. According to the latest figures from the German Insurance Association (GDV), German property and casualty insurers received €76.6 billion in premiums in 2021. But they also had to pay €62.3 billion in benefits, a good 20 percent more than past year. The combined ratio was 102 percent. This puts the damage expenses incurred, including administrative costs, relative to the contributions paid, and should be less than 100 percent if possible. Otherwise, the insurance companies will outbid you.
The main reasons for this were the effects of the corona pandemic and high losses from natural disasters. Now, rising prices in the euro zone are making claims settlement even more expensive. “Persistently high inflation could become a problem for property and casualty insurers,” warns Christian Badorff, an analyst at Moody’s. He sees great challenges, especially in auto and home insurance.
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Major central banks had long dismissed inflation as a temporary phenomenon, but it is now becoming clear that inflation is likely to remain higher for longer than originally thought. Prices in the euro zone rose 5.1 percent in January, a new record for the monetary union. And in Germany, too, inflation was higher than expected at 4.9 percent. The price spike following devastating damage in the Ahr Valley, among other places, hit German property insurers at a particularly critical time.
Motor vehicle insurance: hardly any increases in premiums, but high accident rate
According to Moody’s expert Badorff, motor vehicle insurers in particular are in a dilemma: On the one hand, many people drove fewer cars during the corona crisis. As a result, there was less damage and little room for insurers to raise premiums. On the other hand, the prices of spare parts and repairs have increased significantly.
As a result, this development could push the entire segment into the red. “If the pandemic subsides and more damage occurs again, the combined ratio of many insurers can quickly rise to more than 100 percent,” says the insurance specialist. According to GDV figures, the industry average rate in 2021 was 95 percent. As a result, Moody’s had already downgraded the outlook on property and casualty insurers to negative in October.
The rating agency Fitch gives the industry a stable perspective. But in a presentation, analyst Christoph Schmitt also named inflation as one of the issues that could weigh on the sector this year.
Motor vehicle insurance already faces challenges, as figures from GDV show. In comprehensive and partial comprehensive insurance, damage-to-cost ratios were already 103 and 104 percent respectively in 2021. Motor vehicle insurance, the largest source of revenue for insurers, is already in negative business in areas important. This was mainly due to the high level of damage caused by last year’s flood. Cars damaged in the floods accounted for 50,000 of the 250,000 reported claims, all of which are costly total comprehensive losses. The result: Full and partial insurance premiums will rise this year.
In addition to the catastrophic losses, there is now rising inflation, which is exacerbating an already existing trend. “The cost of spare parts has been rising faster than inflation for years,” explains a spokeswoman for market leader Huk-Coburg. This trend is likely to continue this year as well.” Labor costs could again be felt in the repair area, according to the Huk-Coburg spokeswoman.
>> Read also: Huk-Coburg suffers from falling prices
Just at first glance, motor vehicle liability insurance, which every car owner should take out, looks a little better. The combined rate here was 89 percent last year, but premium income stagnated. According to Moody’s, Badorff von Moody’s could see the effects of inflation particularly clearly in the future: “While comprehensive insurance claims are often settled quickly, liability settlement periods are generally longer; increased Inflation makes claims even more expensive for insurers.
Residential buildings insurance – even in the past, it was often a loss
The situation in the private insurance of residential buildings is more dramatic. The combined rate here was 143 percent last year. “In homeowners insurance, providers have barely made a profit in the past, that is, before the record damage year in 2021. High burdens from natural catastrophes, coupled with rising prices from artisans and material costs, make the line of business a loss for many insurers,” says Badorff. Delivery bottlenecks in the corona crisis also contribute to the difficult situation.
Rising construction costs have been a problem for insurers for some time, but according to Fitch Schmitt’s expert, the further increase in raw material prices could cause an aggravation again. Many owners of residential buildings have purchased what is known as flexible replacement value insurance. This means that in the event of damage, you repair or rebuild your property at current prices. It is obvious that insurance premiums will have to go up here.
The “Versicherungsmagazin” recently asked some suppliers about this. According to this, R+V Versicherung and Alte Leipziger plan premium increases in the double-digit percentage range this year, Signal Iduna with up to ten percent, and people insured in Axa and HDI should also be prepared for significantly higher premiums. .
“Some homeowners insurers have already announced plans to significantly increase premiums and we expect this to happen across the market,” says Moody’s Badorff. Fitch makes similar forecasts: The rating agency estimates that homeowners insurance premiums will rise by an average of 9 percent this year, after 6 percent in 2021.
There is only one area where insurers are hoping for relief from rising inflation. “On the investment side, high inflation means that negative returns will no longer be possible in the future,” Greco, CEO of Zurich, expects. So that his house can invest again better than in previous years.
Plus: Lessons from the storm: how the insurance gap in Germany can be reduced