Property, loss of earnings and technical insurance
Property and loss of earnings insurance
Once again, a difficult macroeconomic environment characterises the next major renewal round of property insurance for industrial companies. Over the past five to six years, companies have been faced with constantly rising premiums and a shortage of capacity. Can industrial companies at least hope for stable premium rates in property insurance this year?
A look at last year's claims
Before we venture an outlook, it is always worth taking a look back. What losses were incurred last year and in the first half of this year, what conditions are companies facing and what environment are insurance companies operating in? Fortunately, 2022 did not see a loss event as significant as the flood catastrophe in 2021, but insurers are still expected to post another loss last year. The German Insurance Association (GDV) is again forecasting a combined loss/cost ratio of over 100 per cent.
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One of the causes is a series of major fire incidents, some of which have led to losses in the hundreds of millions. In the GDV's overview of major losses, which lists the ten largest individual losses of a year, major fire or explosion losses with their considerable impact always document the most prominent cases. In the overview for 2022, "water pipe damage" appears in third place with a mid-double-digit million figure. This phrase refers to the burst giant aquarium of a hotel in Berlin with its building and water damage.
Inflation drives up the sums insured and makes claims more expensive.
In addition to these isolated losses, the storms known as "Ylenia", "Zeynep" and "Antonia" led to an average claims burden in 2022, particularly in the spring, although this is already very high overall. According to the GDV, severe weather with storms, hail, lightning and heavy rain cost German property insurers a total of 3.4 billion euros.
This year, we all still remember the images of the devastating earthquakes in Turkey and Syria. In addition to the personal fates, this massive earth movement and the destruction of many cities will be reflected in the business results of internationally active insurers.
Inflation and rising reinsurance costs influence the primary insurance market
In addition to the claims situation, economic conditions have an impact on the terms and conditions of insurance contracts. For some time now, price increases have been reaching unprecedented levels. Policyholders currently have to assume that the value of their buildings will increase by almost ten per cent and that technical and commercial equipment will rise by around 7.5 per cent. This total adjustment will also be reflected linearly in the insurance premiums, which will therefore rise by an average of ten per cent in property insurance - due to price increases alone.
There will also be upward adjustments to the sums insured for inventories. For finished goods, which may be insured at the sales price, the market price alone will result in an increase. In addition, many companies are responding to the shortage of many goods by holding more stock. In addition to higher values, this also means that more capital is tied up, and many companies are experiencing increasing congestion on their premises. In addition to the issue of the correct sum insured, these behaviours also have an influence on the valuation by insurers. Large concentrations of value, an increase in fire loads and less "freedom of movement" can lead to a poorer assessment by insurers, which would have a direct impact on price and capacity.
Some inflationary consequences will initially remain with the insurer: older claims that have not yet been finally settled could subsequently become more expensive if the necessary repairs are now carried out. The amounts reserved for this may not be sufficient and may have to be adjusted upwards. Interruption claims are also extended - and therefore more expensive - if the downtimes are significantly longer due to a lack of spare parts or skilled labour. This naturally puts pressure on insurers' business results.
In addition to the tense macroeconomic environment, primary insurers are facing a tougher reinsurance market. Due to the premium increases over the past six years, some insurers have improved their business results to such an extent that they have also been able to report profits in the property insurance segment at their annual press conferences. Reinsurers, almost all of which operate worldwide, have not been able to realise this business development. The pressure to achieve positive results is growing there. Reinsurers therefore significantly raised prices for primary insurers at the end of last year, particularly in the area of natural hazards.
The number of reinsurers is relatively small compared to the number of primary insurers. A small number of companies can therefore have a strong influence on the market situation for primary insurers. In addition to the premium increases, significantly higher retentions were apparently agreed for primary insurers. A massive increase in the conditions for reinsurance is certainly accompanied by a decision on the "justifiable" costs, which is likely to be reflected in a greater own contribution by the primary insurers.
Primary insurers were no longer able to pass on these changes to their customers in the latest renewal round, as the offers for policy renewals had already been submitted. Insurers will endeavour to close the resulting gap in the next renewal round.
As a result, the difficult market conditions for companies will continue.
Capacity bottlenecks for natural hazard claims
Internationally active companies with locations in so-called hot-spot regions, i.e. areas with a significant risk of natural hazards, are no longer able to cover their insurance needs. Examples of these hot spots are Florida or the Caribbean with regularly occurring hurricane events as well as California and areas of Turkey with an extreme earthquake risk. The capacities available worldwide for these events are simply no longer sufficient.
Companies with a risk focus on natural hazards must be prepared for declining capacities.
Only risk carriers that provide additional capacity in the form of parametric cover concepts (see article on parametric covers) offer alternatives or any insurance cover at all. The prices are significantly higher than those of traditional insurance and a high level of own risk is a regular feature of such solutions. In return, a benefit is provided if previously agreed parameters (e.g. certain wind speeds at previously defined locations or earthquake strengths at a previously defined distance from the insured property) are reached or exceeded. Proof of loss is then no longer required - the benefit is already precisely defined in advance by the criteria.
This form of cover has not yet become widespread in Germany, as the required capacities can largely be covered by the traditional insurance market.
Sustainability and the use of emission-free energy
Many companies are endeavouring to significantly reduce their CO2 emissions footprint. They are utilising their large roof areas in particular, but also walls to install photovoltaic systems. In many cases, these environmentally friendly measures are accompanied by reservations, restraint in underwriting behaviour or even refusals to underwrite. The increased use of this technology is certainly accompanied by a shift in risks. However, these risks are manageable if certain basic requirements are met and all parties involved are open to acceptable concepts and willing to compromise. Here, too, deas provides support, so that companies can expect their ecologically sensible measures to be positively supported by the insurance industry.
Conclusion
The general conditions described above will certainly not lead to a change in the market situation. The difficult market environment with a high and, in some areas, rising premium level will continue. However, it is to be hoped that premium rates will stabilise for most industrial companies.
Irrespective of this, an increase in premiums will result from the inflation-driven increase in sums insured under the value enhancement agreements. Provided that the sum insured is adjusted accordingly, a stable renewal for risks that are not conspicuous for damage appears realistic. Companies that actively participate in the positive development of the risk situation have additional arguments in favour of price stability. The possibility of being able to fix conditions for two years is also likely to become more common than has been possible in recent years.
Technical insurance
Still a haven of stability compared to other sectors
According to figures published by the GDV, the premium income of insurers in technical insurance in Germany is around 2.7 billion euros. Compared to 2021, this is an increase of around 6.5 per cent, which is slightly lower than in the previous year. Claims expenses (before settlement gains) amounted to around 1.6 billion euros, five per cent lower than in 2021. In that year, claims payments totalled 1.7 billion euros. As a result, the combined ratio improved from 89.6 per cent to 83 per cent.
As in previous years, stable results were once again achieved, which will also lead to largely equally stable and attractive premium conditions and predominantly good competition in 2023. However, we continue to see a slight upward trend in premiums for construction insurance.
Market situation and review
In 2022, the market for traditional engineering insurance products was stable and attractive conditions were realised for industrial customers. There is still healthy competition in this segment with a sufficient number of providers.
The trend towards a slight increase in premiums in the area of construction insurance that began in 2021 continued in 2022. Increased claims costs as a result of inflation and higher expenses due to natural hazards had a negative impact on insurers' loss ratios in this segment. However, in individual cases, particularly for major projects or large turnover contracts, very attractive conditions can still be negotiated.
The in-house, very customer-friendly insurance conditions of deas can still be placed on the market and thus ensure very good cover in the event of a claim. The isolated demands from insurers since 2020 for the acceptance of exclusions of cyber consequential losses (silent cyber) and pandemic consequential losses have been largely concluded. These cover restrictions have not been fully implemented. Last year, there were no further attempts by insurers to reduce cover. As deas, we are still able to offer our customers attractive conditions.
The market is very customer-friendly, especially for insurance policies for renewable energy generation.
Despite higher prices and an uncertain economic situation, there was also high demand for project insurance in 2022. The construction volume in Germany rose by a record-breaking 13.6 per cent in nominal terms last year, but this growth was solely due to the rapid rise in construction prices. Although this provided construction companies with good turnover, construction activity fell by two per cent when adjusted for inflation. Urgently needed new residential construction was particularly affected, falling by as much as 4.5 per cent in real terms. This is the result of recent calculations of the construction volume by the German Institute for Economic Research (DIW Berlin). According to the DIW, similar declines are also expected this year. Adjusted for inflation, the construction volume is not expected to return to positive territory until 2024.
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The trend towards specialisation in the areas of energy, renewable energies, power and construction, which has already been noticeable in recent years, is continuing. Insurers' hunger for information within the tendering process continues to grow. Insurance companies often only provide non-binding indications, which then have to be renegotiated at length afterwards.
Insuring companies that generate energy from fossil fuels is still very difficult and will become even more difficult as a result of the ESG issue. This is particularly true for coal-fired power plants.
Insuring coal-fired power generation will become increasingly difficult in the future.
Renewable energies
A windy and sunny year - together with a large increase in new photovoltaic systems - led to rising electricity generation from renewable energy sources. At 254.0 terawatt hours (TWh), it reached a new record level (2020: 251.5 TWh). This development was mainly due to electricity generation from photovoltaics and onshore wind energy, which increased by 23 and nine per cent respectively compared to the previous year. The share of renewable energies in gross electricity consumption thus rose to a total of 46.2 per cent.
In the heating sector, the share of renewable energies in final energy consumption rose from 15.8 per cent in 2021 to 17.4 per cent in 2022.
Against the backdrop of the war in Ukraine and the associated high prices and impending gas shortage, fossil fuels in particular were saved in 2022 - while the supply of energy from biomass increased slightly. The expansion of solar thermal systems and heat pumps continued unabated. All of this led to an increasing share of renewable energies in this area.
The hedging opportunities for renewable energy systems are still very good. A competitive market and a sufficient number of providers create attractive premium conditions and very good, far-reaching terms.
There are still areas that are difficult to insure:
- Storage, operation and production of lithium-ion batteries
- Recycling of these batteries
- Cover for biodiesel plants
- Plants for hydrogen production or the production of e-fuels
Market development 2023
The economic and social developments of the past two years, such as inflation, particularly due to a drastic rise in energy prices, higher interest rates, climate change, a shortage of skilled labour and uncertain future prospects, will also leave their mark on the technical insurance sector.
However, we expect the technical insurance market as a whole to remain largely stable and competitive in 2023 - also on the basis of the insurers' still good results. There is an abundance of providers and attractive prices and conditions for our customers, particularly in traditional machinery and electronics insurance.
The market for technical insurance remains stable.
However, the market for construction and assembly insurance is likely to be very tight, at least in the construction services segment, due to the reasons mentioned above. Price increases of up to 20 or 25 per cent are to be expected. According to construction industry forecasts, the number of projects will increase again in 2024, investments will then be made up for, but price developments and the trend towards rising interest rates will have a dampening effect.
The insurance market for renewable energies will grow strongly in 2023 and the following years. Due to the boom in photovoltaics and the expected increase in investment in wind energy, the need to insure these projects will also rise. New projects in hydrogen technology or other forms of renewable energy will emerge and be brought to market maturity. The insurance industry is called upon to support such developments with the appropriate insurance solutions. It remains difficult to insure conventional energy suppliers, especially companies that operate in the coal-fired power generation business.
Thomas Hergarten/Andreas Potzelt