The July floods in Germany and Northern Europe are a key talking point at Baden-Baden. It is easy to see why. In Germany alone, insured losses are estimated at €7 billion ($8 billion) by the German Insurers Association. On top of that, there could be up to €2 billion losses from Belgium and other additional losses from Luxembourg, the Netherlands, Switzerland, and elsewhere.

“When you look at the total insured losses from this particular event as it looks now, it’s the biggest insured loss event ever in Europe,” said Yörn Tatge, senior vice president and director of AIR Worldwide, speaking to Intelligent Insurer’s 1.1 Club from the event. “In Germany, it was the biggest by far.”

As he said however, the lessons the industry can and will draw from the event remain unclear. It was, in its way, both a foreseeable loss and a unique event.

Should it be a shock to the industry? “It depends how you look at it,” said Tatge.

Something old: an established risk

On one hand, the total losses from the event should not be a complete surprise. AIR Worldwide has been modelling inland flood risks for a decade, and the peril’s capacity to cause significant losses in Europe is well known.

“We have such loss events in the models,” Tatge pointed out. He takes issue with the inclusion of European floods as a “secondary peril” alongside the winter freeze in Texas in early 2021 and wildfires since. These, again, are a key topic of conversation at Baden-Baden.

“Some people call the July floods in Europe and Germany a secondary peril. We do not because it is part of the pan-European flood models. Flood is one of the main perils you have in Europe. We’ve seen that in the past: in 2002, 2013, 2016 and now 2021.

“It’s nothing completely extraordinary. You could have been prepared for at least for the size of the losses,” he declared.

Likewise, the tendency to attribute the big losses to climate change, while not mistaken, is incomplete.

“Climate change is increasing the frequency and severity potentially for catastrophic events around the world. But you should not forget other effects that have come into play here. In Germany, for instance, building materials have increased in price by 30 percent since January,” he said.

“Climate change is a major concern, but we need to put it into the context that other factors come into play as well and sometimes have a bigger role.”

Something new: an unprecedented event

On the other hand, if the size of the losses were foreseeable, the event that caused them was undoubtedly “special”, as Tatge put it.

It started with the region affected. “Normally, you would expect these large losses along the usual suspects such as the Danube, Elbe, or Rhine. In this case, it was the Ahr as well as some small rivers,” he said.

Then there were the factors leading to this and the heightened losses: heavy rainfall before the flooding (the heaviest in over a century) so that the ground was already saturated; slopes along the Ahr that helped the water build speed; and the logs and debris this brought into the water that clogged bridges, leading to large surges.

The speed of the water and the debris ultimately combined to “torpedo” buildings, explained Tatge.

“The level of damage was just unprecedented,” he said. “Normally, you would see waters rise and buildings under water—it’s a big loss but manageable. In this case, many buildings were destroyed by the amount of water, its speed and the debris.”

The impact on some insurers was particularly acute.

“You could have been prepared for the size of the losses, but what made it difficult is that the region affected was rather small, and there were companies that had a high market share,” Tatge said. “They were affected very heavily.”

Learning the lessons

What it will mean for how re/insurers look at flooding in future?

First, while the nature of the event was unexpected, the modellers have been able to explain it. AIR was able to model the flood and publish this on its website two weeks after the event.

“We are still analysing losses, looking at what happened and talking to clients to learn more from it,” Tatge said. “If we feel it’s necessary, we’ll incorporate these findings into future versions of the model, but overall we are quite happy with its performance.”

Second, rate rises from losses are likely to be tempered by plentiful capacity in the industry.

“It is still the case that there’s a lot of capital in the market, so the market will to a certain extent absorb the losses,” he said. “My expectation is that prices will go up but not to the extent some people are expecting.”

At the same time, however, the focus the event has brought to modelling flood—whether considered as a secondary peril or not—and on climate change is not going away.

The current models already incorporate the effects of climate change in the short term with time horizons of a decade. “Every time we have an event, and we learn something from it, we incorporate it into our models,” said Tatge.

Increasingly, though, businesses, investors and others are also looking to the longer term, and AIR provides alternative event sets to enable clients to test sensitivities and look at the potential impact of climate change. Demand for these is only likely to grow.

“It’s increasingly required by rating agencies and supervisory bodies such as the European Insurance and Occupational Pensions Authority in Europe. They are asking the insurance companies what they are doing with regard to climate change and whether they can quantify the impact it will have in the long term,” he explained.

“If you’re looking at losses for the next few years, the models have a time horizon of about 10 years, so you’re fine. But when you want to look behind the losses or at the longer term, then you need alternative tools,” he concluded.

To view the full 1.1 Club interview click here

Image courtsey of Shutterstock / Romolo Tavani