One of the federal government’s most important goals is to contain inflation. But there is an authority that explicitly demands steeper price increases from companies. The financial regulator Bafin believes that insurers could get into trouble if they don’t increase their prices more significantly than the companies are already doing.
There are signs of relaxation in consumer prices. The so-called claims inflation, on the other hand, continues to rise, and more significantly than normal inflation. This means, for example, increasing costs for repairing accident-prone vehicles. The repair cost index in motor vehicle insurance in the third quarter of 2023 showed a similarly high year-on-year increase of almost eight percent as in 2022.
Bafin demands that insurers set aside enough money for the increasing damage and increase prices so that they do not end up in the loss zone. The authority is not satisfied with the efforts made so far. “In individual sectors such as motor insurance, premiums even fell due to the high level of competition,” criticizes speaker Filip Uzelac-Schuler in the in-house Bafin Journal. “With losses looming in these important lines for the 2023 financial year, companies urgently need to increase premiums.” But because of the tough competition, the companies fear losing market share if they increase their prices too much.
The reinsurer Hannover Re, which has a good overview of motor vehicle insurance, expects a technical loss of 2.7 billion euros for car insurers next year. In 2023 it was three billion euros. This year, motor vehicle insurers are spending around 1.10 euros on damages and costs for every euro in premiums they collect. However, this calculation excludes the insurer’s investment income from the reserves invested.
“Claims inflation must remain high on the insurers’ agenda,” demands the Bafin speaker. As in the previous year, Bafin will analyze very closely how insurers take them into account in their 2023 annual financial statements and intervene if necessary.
This threat is no coincidence. Bafin wants to prevent insurers from running into financial difficulties in a few years and no longer being able to pay for damages because they have not set aside sufficiently high provisions. It is a long-term problem: companies have to make high provisions, especially for damage or possible damage from liability insurance.
An accident victim who suffers a disability may be entitled to payments from the insurer for care and treatment for decades if the company has insured the at-fault driver. Mistakes by doctors or architects can lead to claims from injured parties for many years to come.
Bafin wonders whether the provisions for this are sufficient given inflation. As early as 2022, the supervisory authority had warned that companies should take inflation into account appropriately. The authorities are not particularly satisfied with the result of their warning. The technical provisions have even shrunk, writes Uzelac-Schuler. “This is surprising given the high rate of inflation.”
His accusation: Many insurers make overly optimistic assumptions about the development of inflation. “For 2023, the assumptions about claims inflation were in some cases well below relevant representative inflation indices.”
“It is clear: many insurers will have to make improvements for the 2023 balance sheet date,” writes the Bafin official. In addition to the current claims inflation, they would also have to take into account the high level of uncertainty regarding future claims expenses.