Insurers Stuck in the Rain

After suffering through nearly a week of torrential downpours and record-breaking floods, Germany and Europe are just starting to clean up and calculate the damages.

Everywhere one looks, the heavy rainfall and unseasonable storms have left a trail of chaos and destruction. Both private and public property has been ruined, agricultural land has been destroyed, and the infrastructure in large parts of Europe has come to a standstill.

"The full extent of damage is not yet definable," said Manfred Goedecke, director of the German Chambers of Industry and Commerce, to reporters on Wednesday. The losses are incalculable for households and businesses in the regions most hardest hit.

And of course the damage also effects the insurance industry, which suddenly sees itself forced to pay out large sums of money to policy holders at a time when the industry itself is treading water.

Uncertain cost forecasts

Allianz and many other insurers in Europe are reluctant to say how much the recent weather catastrophe will cost them in the end. But with thousands of households and businesses effected by the flooding, the list of damages is likely to be long, and the claims on the insurance companies high.

"It’s too early for an accurate estimate of costs," Helmut Perlet, board member of Germany’s largest insurer Allianz, told the financial daily Handelsblatt. "We’re still busy cleaning up," and therefore the dimensions can’t yet be calculated. The Federal Association of German Insurers echoes this thinking, saying "at the time, we can’t get a clear overview of how high the claims’ costs will be."

But what’s certain is that the financial consequences of the flooding will be extensive and exceed the amount insurance companies paid out in earlier years for similar flood and storm coverage.

"The year 2002 will diverge significantly from the long-term average in terms of flood and storm damage claims," said Arno Junke, director of Germany’s branch for General Cologne Re, the world’s third largest re-insurer.

And according to Allianz, the amount of damages caused by bad weather has increased fourfold just in the first half of the year compared to the same period last year.

Unusual weather leads to unusually high costs

Weather has always played a role in insurance policy coverage. One need only think of the annual flooding of the Rhine. But the recent series of natural catastrophes has been more extreme, say industry experts.

"What’s new about the newest wave of bad weather is the considerable frequency with which storms and floods have left severe damage behind. There were always large single catastrophes like Hurricane Lothar in 1999. But now the insurance industry has to deal with an unusually high number of catastrophes with excessive damages," Junke explained.

Trouble on the horizon for insurers?

If the meteorological and industry forecasts hold true and more bad weather strikes Europe more often, insurers may find themselves struggling to stay above water.

In the long-term, industry analysts say financially-strapped companies could have difficulty coming up with the cash necessary to pay policy holders filing claims for flood and storm coverage. "The insurance industry won’t be able to shoulder everything," Junke predicts. This could especially be the case for small insurers suffering from liquidity problems.

Large insurance companies such as Allianz have faired the storm fairly well, but they too are facing increasing pressure to sell off devalued stocks to cover mounting policy claims. At the moment Allianz says it does not need to readjust its expected yearly gains, however, much is riding on whether or not fall and winter turn out to be stormy seasons.

In this regard, both the insurers and the meteorologists seem to be playing the same game: let’s wait and see.

As for an increase in premium costs, insurance experts have said that it’s still too early for any clear statements and that only a long-term series of catastrophes would prompt that. The question is whether or not that catastrophe occurs within the insurance sector.