Stephanie Vogg, Vice President
2008 Reinsurance Market Position
For several years, catastrophe modeling has provided the basis for decisions on levels of reinsurance retentions and limits. All well-known modeling firms have products for modeling German storms. Some reinsurers also have developed in-house tools to estimate catastrophe exposure. The availability of new flood models and the density of extended elemental perils coverage in the primary insurance market have increased. Consequently, cedents have had a closer look at their catastrophe exposure. This, in turn, has lead to the purchase of some additional capacity.
Most German property and casualty insurance companies purchase reinsurance protection against natural perils to cover their portfolios against a 100-year event. This is most often achieved with an excess of loss cover, but stop-loss covers - or a combination of both - are also common. Stop-loss covers have become harder to place, with the reinsurance market having developed a slight aversion to them. As long as the market continues to advantage cedents, however, we expect that this type of cover still will be placed in the German market. Furthermore, cedents are also interested in capital market solutions to complement traditional reinsurance.
Companies often choose to buy up to a 200-year return level - the protection threshold in sync with current Solvency II guidelines, though new guidelines are expected to be introduced by 2012. The purchase of more capacity at the top end of reinsurance programs is often financed by an increase in retention levels. These trends were once again visible at 2008 renewals.
The main topic of 2008 renewals was whether Windstorm Kyrill would have an impact on pricing or not. The result was that rates did increase for loss-hit programs when reinsurers were seeking a certain pay-back for their losses, while loss-free programs were renewed at approximately unchanged terms. High-frequency layers, in particular, increased in price. Naturally, these were the layers experiencing losses due to Windstorm Kyrill.
Germany’s main natural perils are storm, flood, hail, and earthquake. While earthquakes are rare in Germany, other perils occur more frequently. Winter storm is considered to be the country’s greatest catastrophe exposure by far. However, the economic losses from a major flood or earthquake could equal or exceed those arising from a major winter storm.
Hailstorms often occur in the summer, mainly in the southern part of the country. While these are normally local events, they can cause severe damage. The Munich hailstorm of 1984 remains the benchmark worst-case scenario for a hailstorm in southern Germany, causing EUR1.5 billion (USD 2.1 billion) in economic loss and an insured loss of EUR760 million (USD 1.0 billion).
In 2002, the German insurance market experienced its highest annual market loss from flooding. The event affected large parts of Bavaria, Saxony, and other eastern German states. The total economic loss in Germany was EUR11.7 billion (USD 16 billion).
In January 2007, policyholders and primary insurers once again were reminded of the impact storm events can have. Windstorm Kyrill swept over Europe, hitting Germany worse than any other country. Insured losses in Germany reached EUR2.4 billion (USD 3.3 billion), making this the largest catastrophe loss in the country’s history.
Personal and commercial businesses are normally insured against the fire, lightning, explosion, aircraft (FLEXA) perils, as well as water pipe damage and storm. Extended elemental perils coverage - which responds to six perils, including earthquake and flood - can be obtained for additional premiums. Market penetration for the extended elemental perils coverage remains low, however, except for policies covering risks in the states of Baden-Wuerttemberg, Mecklenburg-Western Pomerania, Brandenburg, Saxony-Anhalt, Thuringia, and Saxony. Former monopoly companies in these states used to offer coverage for elemental perils on a compulsory basis. Most companies now doing business there continue to offer the coverage in combination with the standard policies.
In addition, while industrial risks are insured mainly on a named-perils basis, the elemental perils extension (extended coverage that combines storm and other elemental perils) is generally sold with the standard fire policy. Consequently, elemental perils coverage for industrial risks has substantial market penetration.
Note: Euro 0.73 = USD 1.00, as of October 7, 2008
- Stefan Schneider, Assistant Vice President