Frankfurt, Munich Persistently high inflation is becoming a massive cost driver for insurers and their customers. It is now becoming apparent that the significantly increased raw material and procurement prices have noticeably increased the cost of compensating for damage. 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 insurer Zurich, the Handelsblatt. According to the head of one of the world’s largest insurers, this trend is likely to continue this year and next.
The accounts for the past year already brought the insurers a significant minus in a number of places. According to the latest figures from the German Insurance Association (GDV), German property-casualty insurers took in premiums of 76.6 billion euros in 2021. But they also had to pay out 62.3 billion euros in benefits, a good 20 percent more than in the previous year. The combined ratio was 102 percent. This puts the expenses for damage incurred, including administrative costs, in relation to the contributions paid – and should be less than 100 percent if possible. Otherwise, the insurance companies will top it.
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-casualty insurers,” warns Moody’s analyst Christian Badorff. He sees major challenges above all in motor vehicle and home insurance.
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The major central banks had long dismissed inflation as a temporary phenomenon, but it is now becoming apparent that inflation will probably remain at a higher level for longer than originally thought. Prices in the euro area rose by 5.1 percent in January, a new record for the currency union. And in Germany, too, inflation was higher than expected at 4.9 percent. The price hike after the devastating damage in the Ahr Valley, among other places, hit German property-casualty insurers at a particularly critical time.
Motor vehicle insurance: hardly any increases in premiums, but high claims
According to Moody’s expert Badorff, motor vehicle insurers in particular are in a dilemma: On the one hand, many people drove less cars during the corona crisis. As a result, there was less damage and there was hardly any scope for insurers to increase premiums. On the other hand, the prices for spare parts and repairs have increased significantly.
As a result, this development could pull 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 over 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 lowered the outlook for property-casualty insurers to negative in October.
The rating agency Fitch gives the industry a stable outlook. But at a presentation, analyst Christoph Schmitt also named inflation as one of the issues that could weigh on the sector this year.
Motor vehicle insurance is already facing challenges, as the GDV figures show. In fully comprehensive and partially comprehensive insurance, the damage-cost ratios were already 103 and 104 percent respectively in 2021. Motor vehicle insurance, the largest source of income for insurers, is already in negative business in important areas. This was mainly due to the high level of damage caused by the flood disaster last year. Cars damaged in the floods accounted for 50,000 of the 250,000 claims reported, all of which are expensive fully comprehensive total losses. The result: the premiums for full and partial insurance will increase this year.
In addition to the catastrophe 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 the market leader Huk-Coburg. This trend is likely to continue this year as well.” Labor costs could make themselves felt again in the repair area, according to the Huk-Coburg spokeswoman.
>> Read also: Huk-Coburg suffers from falling prices
Only at first glance does the motor vehicle liability insurance, which every car owner has to take out, look a little better. The combined ratio 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, the settlement periods for liability are generally longer – rising inflation then makes claims even more expensive for insurers .”
Residential building insurance: Even in the past, it was often a loss
The situation in private residential building insurance is more dramatic. The combined ratio here was 143 percent last year. “In homeowners insurance, the providers made hardly any profits in the past, i.e. before the record damage year 2021. High burdens from natural catastrophes, coupled with rising craftsman prices and material costs, make the line of business a loss-making business for many insurers,” says Badorff. The delivery bottlenecks in the corona crisis also contribute to the difficult situation.
Rising construction costs have been an issue for insurers for some time, but according to the Fitch expert Schmitt, the further increase in raw material prices could lead to an aggravation again. Many residential building owners have taken out what is known as flexible replacement value insurance. This means that in the event of damage, you get your property repaired or rebuilt at the current prices. It is obvious that insurance premiums will have to rise here.
The “Versicherungsmagazin” recently asked some providers about this. According to this, R+V Versicherung and Alte Leipziger are planning premium increases in the double-digit percentage range this year, Signal Iduna with up to ten percent, and insured persons at Axa and HDI must also be prepared for significantly higher premiums.
“Some homeowners insurers have already announced plans to increase premiums significantly, and we expect this to happen across the market,” says Badorff of Moody’s. Fitch makes similar forecasts: The rating agency estimates that premiums in homeowners insurance will increase by an average of nine percent this year, after six percent in 2021.
There is only one area in which insurers are expecting relief from rising inflation. “On the investment side, high inflation means that negative returns will no longer be possible in the future,” hopes Zurich CEO Greco. So his house can invest better again than in previous years.
More: Lessons from the storm: how the insurance gap in Germany can be reduced