If the costs for repairs increase due to inflation, the costs for the insurer and consequently for the insured increase.
(Photo: dpa)
Cologne Insurance brokers have a lot of work to do. Because rising prices are having an impact on coverage and premiums in property insurance. Policies are getting more expensive. Even the financial regulator Bafin warns of “mandatory higher contributions”. Customers face another danger: underinsurance. This is the case, for example, if the insured value of a house or inventory is now significantly greater than the sum insured due to inflation.
Higher contributions are on the cards for the future. Many current contracts contain an adjustment clause for the premiums, which the product providers are now implementing. The extent to which an insurer is turning the screw on prices depends on the competition, its own strategy and financial strength. Insurers are still keeping a low profile when asked. Meanwhile, Oliver Kieper, CEO of Netfonds Versicherungsservice, reports that there are surcharges of “ten to 25 percent” on residential building policies. And an end is not yet in sight. He cites “explosive trade costs” and the damage caused by the 2021 flood disaster as the cause.
How will private households and companies react? In this situation, it is important to keep a cool head and save in the right place, i.e. not to rashly contradict the premium increase or even cancel the policy. Insurance brokers can support their customers: Instead of paying a higher premium, a customer can agree on a higher deductible. A tariff change can also make sense. Showing such alternatives is the job of brokers. Above all, underinsurance should be avoided. Otherwise there would be a nasty surprise in the event of a claim. The property line is about covering existential risks. Hardly anyone can pay for damage to their own house or business on the fly.
Strong increase in business
The situation is particularly precarious for commercial customers. The indices relevant for the adjustment of totals and the calculation of the insurers, such as the producer price index for commercial products, are developing “particularly alarmingly”, says Thomas Sepp, board member at Allianz industrial insurer AGCS. In fact, a look at the index’s recent performance reveals runaway inflation. According to the Federal Statistical Office, commercial products rose in price by 45.8 percent in September compared to the previous year. For the past year, the rate has grown at double-digit percentages every month.
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“The materials are not only expensive, but also not available, or at least not quickly available, due to bottlenecks,” says Sepp. The average amount of damage increases. His advice in this situation is: “Determining and updating the insurance values is an urgent concern for everyone: insurers, brokers and the insured.”
It is important that companies regularly review and adjust the value of assets and the impact on replacement or business interruption costs to ensure they are fully compensated after a loss, meaning they are not underinsured. With his statements, Sepp refers in particular to the situation in large companies and corporations.
The risk of underinsurance is also real for small and medium-sized commercial enterprises. Most policies contain a value surcharge clause to automatically adjust the sum insured. “Due to high inflation, however, it is no longer certain that the clauses will adequately reflect the increase in insurance values,” explains Olga Losing-Malota from the management consultancy Willis Towers Watson (WTW). “We therefore recommend checking the value surcharges as well.”
Index specifies adjustment
In the private sector, the sum insured is usually also adjusted to the development of inflation – provided the contract contains a corresponding clause. For example, the adjustment in residential building insurance is based on the construction price and standard wage index, with the construction prices being included in the calculation with a weight of 80 percent. According to calculations by the Federal Statistical Office, construction prices rose by 16.5 percent in August 2022 compared to the same quarter of the previous year.
“For policyholders there is a risk of being underinsured,” the insurer Volkswohl Bund points out. Many consumers have agreed to waive underinsurance. However, the clause does not help in the event of a total loss if a new house or the replacement of the entire household contents and the insured costs are higher than the agreed sum insured.
“The upper limit of the insurance benefit is always the agreed sum insured,” says the specialist department of the insurer Volkswohl Bund. You don’t have to explain that to a broker. It is important that he checks with his customers whether the respective tariff includes a waiver of underinsurance and whether the sum insured needs to be adjusted.
The high rates of inflation are shaking up the coverage and price structure in property insurance. With a delay of one to two years, many insurance companies are likely to increase their premiums significantly, especially for commercial insurance. At the same time, private customers and companies are threatened with underinsurance – despite the fact that tariff adjustment mechanisms often exist. Brokers with a corresponding mandate should now approach their customers and point out the changed situation. They can also use this opportunity to optimize finances and support their customers in raising liquidity if they need it.
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