Why Mandatory Natural Disaster Insurance Alone Fails: A Three-Pillar Solution from Allianz
The increasing frequency and intensity of natural disasters pose enormous challenges for the insurance industry. Climate change is rapidly altering the risk landscape, raising the critical question of how to insure against weather extremes. Against this backdrop, Germany is currently debating the introduction of mandatory natural hazard insurance for properties. However, in a recent interview, Klaus-Peter Röhler, a member of the Board of Management of Allianz SE, urgently warns of the risks of such a standalone approach.
The Pitfalls of a Standalone Mandatory Insurance Model
"An isolated mandatory insurance is not a solution. It does not address the cause of the increasing burdens; it merely redistributes them," cautions Röhler. This approach would not lower premiums but would only keep pace with growing damages. A further problem: Without risk-based pricing, incentives for prevention would be lost. The consequence would not be an expansion of insurability limits but reaching them even faster.
The Three-Pillar Concept for Sustainable Climate Risk Management
Instead, Röhler advocates for a comprehensive three-pillar concept based on the interplay of prevention, market-based risk pricing, and clearly defined state support. This framework aims to ensure insurability and affordability even in times of climate change.
Pillar 1: Prevention and Climate-Resilient Infrastructure
The first pillar calls for a consistent focus on risk prevention, effective protective measures, and climate-resilient construction. Public and private investments in protective infrastructure are as necessary as targeted measures by policyholders themselves. Röhler points to the dramatically slow pace of flood protection in Germany: only five percent of projects planned since 2013 are completed, with about 80 percent not even started. At this rate, the plan would be fully implemented in 100 years at the earliest. The economic efficiency speaks for prevention: every euro invested saves four to ten euros in reconstruction costs.
Pillar 2: Market-Based, Risk-Adjusted Insurance Pricing
The second pillar concerns the insurance business itself: insurers must continue to be allowed to assess and price individual risks. "Premiums that reflect individual risk reward effective prevention and avoid perverse incentives," says Röhler. Subsidized one-size-fits-all solutions, however, endanger the balance between risk and premium and thus the entire insurance system.
Pillar 3: State Backstop for Extreme, Rare Events
The third pillar envisions state support for rare, extreme loss events, such as 200-year floods. Here, a state "stop-loss" mechanism could help cushion market volatility without distorting competition. "The design is crucial—it must complement private capacity, not replace it," emphasizes Röhler. Only this way can the system remain stable even in extreme years without losing its market-based dynamics.
Concrete Steps for Effective Prevention
Beyond large-scale state projects, Röhler argues for clear guidelines for private households. Climate protection must be bindingly anchored in building codes. This includes creating building bans in high-risk zones and mandatory climate risk assessments for every building permit. Furthermore, targeted subsidy programs are needed to support homeowners in prevention-oriented construction, such as replacing oil heating systems in flood-prone areas.
Another central instrument could be a national prevention register. It would transparently show which protective measures are planned where, their implementation stage, and the expected completion date. This would not only enable greater citizen participation but also better integration of current risk data into insurers' assessments.
In summary, the debate cannot be reduced to a simple yes or no on mandatory insurance. A sustainable strategy for managing climate risks and natural disasters requires a holistic approach. The three-pillar model of prevention, risk-based pricing, and state backstop offers a path to maintain a functional insurance market, protect communities, and build long-term resilience against the impacts of climate change.