Natural disasters - The conundrum facing Samaritans: Why policymakers face challenges in imposing mandatory insurance.
In the aftermath of the massive flood in 2002, the idea of liability insurance against disastrous natural events was being considered. At that time, a joint task force of the federal government and the states had been organized, only to be disbanded two years later without any conclusive outcomes. Following the heavy rainstorms that created more devastating floods in the Ahr Valley in 2021, the discussions on such a liability insurance were revived. It's possible this type of insurance could become a reality if the federal government gives its approval this summer.
The federal states are pushing forward: In March 2023, they reached a consensus in the Bundesrat to "pursue the goal of a liability insurance against natural disasters." The federal government is expected to soon present a unified solution.
The long, winding road to liability insurance for natural disasters
This is the second attempt since the flood in the Ahr Valley. The last one was halted by the federal government due to concerns over the potential financial burden for insured individuals. The traffic light coalition back then didn't want to impose "another heavy burden" because of increasing energy prices at a time when Russia invaded Ukraine, leading to inflation.
Now, during the third attempt: A working group comprising of the federal government and the states has been meeting since December with plans to negotiate the outcome with Chancellor Olaf Scholz (SPD) and state prime ministers on June 20th.
Not quite half of the houses in Germany are insured against flood disasters
A typical household has two types of insurance - contents insurance and building insurance. Both can be taken with or without protections against natural disasters.
In the ongoing discussion, it's about insuring the buildings. Out of the total 8.5 million building insurance policies, only half of them include protection against flooding. Besides the risk level, the high cost of premiums is often the reason for many homeowners ignoring such coverage.
The "Why don't more people insure?" puzzle
No one wants to experience a major flood that rarely occurs, so they overlook the possible risks. There's also the "Samaritan's Dilemma," wherein the state has to step in to cover damages in case of a disaster. The state wouldn't be able to sit by idly and watch. Additionally, generous citizens often provide financial assistance.
Due to these factors, homeowners often consider insurance as unnecessary. This leads to higher premiums for others.
Should everyone be required to have this insurance? Two groups support this idea, believing that almost all homeowners would be insured under such a legal obligation. The state wouldn't have to intervene, and no one would lose their livelihood. There would be no confusion about who caused the damage or how it should be compensated. Plus, it would be unfair that the taxpayers who don't own homes, but still contribute to the tax pool, have to fund the expenses for those dealing with flood damage.
A responsibility-based insurance, similar to how auto insurance functions, could be the solution. The premiums would vary based on the location of the house and the safety measures in place. This would incentivize homeowners to enhance their home's protection to reduce the cost of their contributions.
On the other hand, creating a distressed home in a flood-prone area is currently normal, with more than 270,000 homes in highly vulnerable flood zones being constructed every year, warns the Insurance Association GDV.
What could possibly go wrong with this plan?
Personal freedom, as well as contractual freedom, are important values. Everyone should be able to choose whether or not to enter into a contract. While many kinds of insurance require mandatory coverage, one revolving around self-inflicted damage is uncommon.
In such a scenario, it's unclear how the government would enforce the legal duty.
If a legal duty is put in place, the financial burden on some homeowners could be too high. For example, in high-risk areas, e.g., Class 4, a flood once occurs about every ten years. Here, an insurance with a low own contribution could cost hundreds of euros annually for a standard single-family home.
There's also the issue of small and online insurance companies. A legal requirement would make it a losing business model for these organizations. They'd have a tough time covering the risk in areas with few insured individuals, where rare and expensive events could happen. Not to mention the logistical challenges for small online firms that could visit a house to inspect it.
Even people with very low risk facing minimal threats still have to shoulder the costs of the insurance they'll likely never require. Estimates range from 50 to 100 euros per year. On the bright side, these customers are crucial to keep insurance competitive.
The legal conundrum surrounding this kind of liability insurance
What are the legal implications of a liability insurance for natural disasters?
The federal government is exploring the idea of implementing a duty insurance for individuals, depending on their personal risk and the cost-effectiveness. This comes after the Federal Constitutional Court's decision in the case of long-term care insurance, which acknowledged the legislature's power in preventive care. This ruling could also potentially apply to basic damage insurance.
However, the high costs of insurance remain a concern. The General German Insurance Association (GDV) predicts that insurance rates could potentially double within the next decade due to climate change. Some concerned voices, like consumer associations, suggest social compensation for insurance premiums.
Reinsurance for catastrophic incidents
Insurers also require insurance: In cases of major damage, there are entities known as reinsurers, where insurers can protect themselves from being unable to fulfill their obligations.
At the initial attempt in 2003, this was one of the contentious issues: Is the state willing to share the risk with insurers by providing a guarantee? At the time, the suggested amount was €22 billion, which frightened many politicians. With the recent flood damage, this figure has likely lost its intimidation factor: The federal government alone has allocated €15 billion for rebuilding efforts in the Ahr Valley.
Political divisions
The states are now putting pressure: In recent days, prime ministers Malu Dreyer (SPD, Rhineland-Palatinate), Markus Söder (CSU, Bavaria), and Hendrik Wüst (CDU, North Rhine-Westphalia) have all reiterated the need for mandatory insurance. Saarland's Minister President Anke Rehlinger (SPD) was particularly blunt in condemning the inaction of federal justice minister: "I don't understand how the Federal Justice Minister sits it out and allows thousands of people to suffer and the taxpayers to compensate for the damage in Saarland again."
The Federal Justice Ministry is one of the primary opponents of a mandatory insurance, citing the financial burden on homeowners as the key factor. The house owners' association, Haus & Grund, also opposes this measure. According to association president Kai Warnecke, "This would not prevent a single damage incident."
The CDU/CSU parliamentary group strikes a compromise: While it does not support mandatory insurance, it plans to initiate a new attempt to considerably increase the number of insured. The parliamentary group is currently pushing for a vote in the Bundestag that would automatically include natural disaster insurance within regular building insurance for all insured after a certain date. Those who do not desire this can then opt out within a specified timeframe after being informed about the consequences.
Chancellor Scholz puts on his rain boots
It wouldn't be out of the question for a mandatory insurance to be introduced in the same manner. It's challenging to compel homeowners to purchase insurance. Cars are decommissioned if they lack liability insurance; houses cannot be decommissioned. One possible solution is to increase property taxes. The actual consequence for those who do not take out the mandatory insurance would effectively be that they would no longer receive help from those who do.
Chancellor Olaf Scholz has yet to comment on the insurance liability issue, but on Monday, he made a visit to Bavaria to witness the flood situation alongside other politicians sporting rubber boots, like Markus Soeder. He made the standard political promise: "Solidarity is what we as humans need the most," he stated in Reichertshofen. "We will do everything we can as a federal government to contribute and provide faster assistance."
