With climate change intensifying the frequency and severity of natural catastrophes, insurers and reinsurers are under increasing pressure to adapt and enhance their risk management strategies, prompting Germany’s financial regulator BaFin to outline crucial options for risk reduction.
BaFin emphasises two primary strategies for risk reduction: geographical diversification and product variety. By spreading risks across different regions and offering a wider range of insurance products, insurers aim to minimise the impact of localised disasters and reduce reliance on any single line of business. This approach not only diversifies risk but also enhances resilience against large-scale losses from natural catastrophes.
Insurers also have the option to utilise (partial) internal models to enhance their understanding and management of specific risks.
BaFin recommends adjusting reinsurance structures as another strategy. Many insurers and reinsurers have already adjusted their reinsurance strategies or plan to do so to enhance protection against accumulation losses. Despite rising costs—reinsurance premiums have increased by 20% to over 70%—insurers recognise the necessity of these adjustments to maintain financial stability and ensure adequate coverage for policyholders.
BaFin stresses that if insurers cannot align their actual risk with the regulatory standard formula, additional capital requirements may be imposed. This regulatory measure ensures insurers maintain sufficient financial reserves to cover potential losses.
BaFin highlights the importance of regular reviews of the standard formula for assessing natural catastrophe risks, particularly given the impact of climate change and the rising occurrence of local disasters. The Solvency II Framework Directive mandates these reviews every five years to ensure that risk assessments remain current and effective.
“BaFin expects all insurers to regularly review their models and to fully comply with their own validation guidelines. They must demonstrate in detail that the climate states represented in their models are up to date. Further discussions are needed with selected insurers on this matter,” BaFin concluded.
