Catastrophe Strikes - Should Homeowners Be Mandatorily Insured for Floods?
German insurance companies are bracing for considerable damage resulting from the recent flooding in South Germany. "The images coming out of Bavaria and Baden-Württemberg suggest a devastating situation," said GDV Managing Director Jörg Asmussen in Berlin. "We can only provide an estimate once the water levels have subsided everywhere." Both the 2013 and 2021 floods caused billion-dollar losses.
This event has reignited the debate over liability insurance demanded by the federal states against natural disasters. But what exactly is this type of insurance, and why is there such a dispute?
What is an elemental damage policy and what does it cover?
Conventional home insurance covers storm and hail damage, not flood damage. Elemental policies are a supplementary aspect of home insurance that protects against other hazards resulting from natural elements. However, beware - not every type of water damage is covered by an elemental policy.
For example, if groundwater flows through a drain in the laundry room into the house, this is generally considered a structural issue. There is no liability insurance for elemental damage. In regions particularly susceptible to flooding, homeowners will find it difficult to obtain an elemental policy from an insurance provider.
The controversy over liability insurance
Approximately half of all private buildings in Germany lack insurance coverage against natural disasters. Consequently, the government and the states have often intervened after flood disasters with billions in public expenses.
States no longer wish to shoulder the costs alone and demand that the federal government implement a liability insurance. "The chancellor must finally act and take responsibility," says North Rhine-Westphalia's Prime Minister Hendrik Wüst (CDU).
Pros and cons of a liability insurance
There are two main viewpoints. For those without natural disaster insurance, a major flood may lead to ruin, posing a significant expense for the state.
The opposing argument asserts that it's unfair for the general public to bear the costs when a significant number of homeowners shift their risks onto the public, potentially increasing costs for millions of people. Moreover, the insurance industry fears that the state and citizens might reduce flood protection efforts if a mandatory insurance is implemented, resulting in the insurance always having to pay out. "State and individual flood protection would then be neglected," says Asmussen.
Impact on homeowners and tenants
Should a liability insurance be mandated for all private homeowners, those who live far away from any body of water on a secure hill would also have to contribute to the costs. Landlords might pass on these costs to their tenants, even if they live on the seventh floor. The total price tag is challenging to estimate.
Who opposes the liability insurance?
Insurers, homeowner associations, and Justice Minister Marco Buschmann (FDP) are among the most vocal opponents. "Compulsory insurance is not a practical solution from the Alliance's standpoint," says a representative of the Munich Dax-listed company.
"Without significant increased efforts in prevention measures, it will be challenging to deal with the aftermath of climate change," says a spokesperson for the Alliance. The Ministry of Justice warns that a mandatory insurance for numerous households would lead to "severe financial strains."
What does "better prevention" entail?
Cities built in narrow valleys have had to deal with frequent flooding for centuries. For instance, Passau's historic city hall is located right on the banks of the Danube. Nonetheless, many communities have been situated away from water bodies for centuries, allowing rivers and streams to spread out in broad basins.
A "better prevention" approach involves various measures: The GDV, for example, advocates for a building ban in floodplains. Other preventive measures against flooding include relocating dikes, renovating former floodplains and wetlands.
The next steps
In the spring of 2023, the states urged the federal government, through the Bundesrat, to enact a mandatory insurance. As with any contentious issue, a working group was created. The group is expected to present its findings at the next minister presidents' conference on June 20. At this time, there appear to be no signs of an agreement - see the position of the Federal Ministry of Justice.
Meanwhile, on Thursday (June 6), the Bundestag will vote on a Union parliamentary group motion. It calls on the federal government to present a draft law in which homeowner insurance can only be offered with a natural disaster insurance, which may be rejected after receiving an explanation of the ramifications. Existing homeowner insurance policies should include a natural disaster policy by a set date, which may be declined within a specified period.
