2021 German Industrial Insurance Market Outlook for Machinery and Plant Manufacturers

According to recent studies, Germany is one of the most innovative nations in the world. A key innovation and export driver in Germany is mechanical and plant engineering. In 2018, 4 out of 5 mechanical engineering companies introduced a process or product innovation. Moreover, machinery is the second-largest export good of Germany as an export nation.

Industrial insurance plays an ever-increasing role for the German machinery and plant engineering sector while maintaining and further expanding innovative strength and international competitiveness. It enables companies, which have always operated under uncertainty about the consequences of decisions in meeting their economic objectives, to transfer risks to an insurer to mitigate their risk situation. Simultaneously, the environment in which companies operate has become more unpredictable and complex in recent years. It has also been accompanied by a further increase in the risks to which they are exposed.

Key data for mechanical and plant engineering in Germany

Source: VDMA (Mechanical Engineering Industry Association of Germany)

The German industrial insurance market is changing. Changing market framework conditions are increasing competitive pressure, and the changing risk landscape is transforming market participants’ expectations. Since 2019, VSMA GmbH has reported that the insurance market will continue to pick up, and insurance premiums will rise. “However, we were very surprised by the speed and extent of this development,” said Jürgen Seiring, managing director of VSMA GmbH. The need for insurers to restructure comes at an inopportune time, not just for companies in the machinery and plant engineering sectors.

There were significantly fewer insolvencies in 2020 than in 2019 because of the insolvency filing requirement suspension, despite the Corona pandemic. Once the suspension of the insolvency filing requirement is lifted, we expect the number of insolvency filings to increase. Insurers will therefore act even more cautiously.

Insolvency applications in 2020 compared with the previous year (%)

Source: Federal Statistical Office of Germany

The merger of many insurers, such as AXA with XL, CHUBB with ACE, or HDI with Gerling, has also led to lower staffing levels regarding insurance carriers. During the 2020/2021 contract renewal talks, the VSMA found that the negotiation effort has increased enormously due to the lack of staff. Insurers’ service has also decreased.

Extensive renovations

Almost all industrial insurance lines were affected by restructuring measures. Irrespective of the claims experience, the machinery and plant engineering sector was confronted in some cases with substantial premium increases, demands for significantly higher deductibles, or coverage restrictions. Besides, almost all industrial insurers reduced their capacities. In plain language, an insurer that had previously assumed 100 percent of a particular risk, such as fire insurance, was now only prepared to underwrite 50 percent. There was a need for new capacity from different insurance carriers to fill the gaps(in this case, 50 percent). This trend was widespread in property insurance but also in liability and D&O insurance.

Some insurers no longer want to insure specific industry sectors or only under – from the insurers’ perspective – optimal loss prevention measures. Especially in cyber insurance, extreme premium and/or deductible increases, as well as a more restrictive underwriting policy, are to be expected. Other insurers are no longer willing to insure certain lines of business and have, for example, canceled entire insurance portfolios with VSMA, Seiring further reports. Replacements had to be found for these, and VSMA succeeded in doing so.

Outlook for 2021

We fear that this trend will continue in 2021. However, significant losses in the area of D&O insurance, we should mention the example of “Wirecard” here, will also increase insurers’ restructuring behavior in 2021.

The VSMA is observing a similar situation concerning cyber insurance. Here, too, the machinery and plant engineering sector is now hard hit by losses.”Insurers’ demands for the exclusion of infectious diseases such as COVID-19 from all previous insurance policies were previously unthinkable for VSMA,” Jürgen Seiring reports. This trend will increase and lead to the fact that it will become more challenging to maintain the previous insurance coverage unchanged.

Negative results for the insurance companies reflected the high loss ratios. The long phase of a soft insurance market with falling prices led to the understandable need for restructuring. However, in the past, insurers did not explain the need for financial improvement of their results reasonably, making it difficult to convince customers of the necessary measures, Seiring points out. Furthermore, insurers have failed to reduce their own risk with risk management measures. It would be desirable if insurers as a whole kept their promises by working more efficiently.

The importance of VSMA as the insurance broker for the machinery and equipment industry will increase significantly. Demand for risk management consulting and optimal insurance solutions will continue to grow. Networked manufacturing will necessitate extensions to existing insurance coverages. Interest in alternative solutions is increasing. The first positive results can be seen, as shown our “Industry 4.0” coverage module. It is a small, albeit decisive, ray of hope for 2021.