This paper deals briefly with how the German insurance industry faced up to the challenges and problems which arose as a result of the rapid inflation after World War I.

The policy of "easy money" started in Germany during the early days of the 1914/18 War but it was not until after the war that the full force of inflation was felt.

The conversion rate of paper marks to gold marks gives a pretty clear idea of the accelerating rate of the domestic inflation.

The German insurance industry suffered the full force of these changes, and insurers who were unable to renew foreign business and to earn foreign exchange were exposed to the danger of insolvency. At the height of inflation insurance based on the mark became worthless.

Throughout the property insurance field continuous monetary depreciation resulted in neither the amounts insured nor the premiums keeping pace with the inflated price situations. Over-insurance was permitted in the hope that the insured amount would be adequate if a claim arose, but because the insured amount was higher than the value of the property, policyholders were tempted to commit arson in order to claim the high indemnity benefit. People were anxious to obtain any article with real value which could be bartered for food stuffs and other necessities. There was, therefore, a ready market for stolen goods, and burglary and glass insurance companies had catastrophic losses.

Due to continuous increase in prices, claims were seldom settled for less than the maximum insured amount even when the loss was only partial, and because of the constant increase in prices for materials and labor, it was no longer possible to repair or reinstate the property. "Providence insurance" introduced in 1916 contained a clause permitting both the insured amount and premium to change, if the price of glass changed.

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This was the first indexed property insurance. It failed because the prices increased too rapidly for the adjustments to be handled administratively.

There was no automatic relationship between the insured amount and values of buildings insured. Reassessment of the risk was only permitted after five or more years had elapsed since the previous assessment or if structural alterations had been made. This resulted in a permanent under-insurance. Supplementary insurance became necessary and was in most cases taken out with the competitors of the institution holding the compulsory insurance. Calculation of the premiums on traditional lines became too expensive and so they were calculated by rule of thumb. To further reduce expenses coupon policies for supplementary insurance were issued for standard amounts of 5, 10 or 20 million of marks, on which the premium was already printed. These could be purchased freely by postal money order. The receipt of the post office was regarded as receipt by the company and the date stamp as the date on which the cover took effect.

Foreign currency insurance was a special problem. Industries importing raw materials were anxious to effect fire insurance in foreign currency. Such insurance required authorization by the Supervisory Authority who wished to avoid authorizing it in order to support the German currency as far as possible. This led to the withdrawal of a large part of the export industry from Germany to foreign countries.

Early in 1923 the foreign currency insurance was easier because a notional currency was introduced. The "fixed mark insurance" was based on the "duty surcharge on gold," and "Gomadoba" (gold mark dollar basis) insurance based on the peace time parity of 1 US $ = 4.20 marks was introduced but it suffered because dealings in foreign exchange were very restricted. However, the introduction of the "Rentenmark" in November, 1923, made this insurance completely stable.

Due to the monetary decline insurers did not want to underwrite liability insurance at all.

With the substantial increase in prices the average costs of claims rose dramatically. The free reserves and the reserves for future bonuses for the policyholders melted away. Insurers worked at a loss. On January 1, 1921, the Supervisory Authority authorized a price increase on existing contracts, and the contracts could be cancelled if the policyholder refused to pay the increase. In July, 1921, the Supervisory Authority recognizing that a once for all increase was ineffective allowed insurers to use a "compensation index" which permitted insurers to adjust premiums in accordance with the changes in the cost of living index. But again the adjustment when provided was too little and too late and by 1923 the adjustment no longer had any value to the insurers.

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Ordinary life insurance in force was approximately 14 billion marks in 1913 and had increased to 23.5 billion marks in 1920, but in terms of purchasing power in 1913, decreased to 2.5 billion marks. Increasing amounts of insurance were required to compensate for the diminishing purchasing power, but to achieve this, it would have been necessary to create reserves which kept pace with inflation. In times of inflationary circulation of notes, this was not possible, and attempts were made to try to compensate for the failing currency by mixed investments.

Mixed investments became possible in 1923 when a modification of the Imperial Supervisory Law permitted up to one-half of the legally required reserve to be invested in domestic real estate, in secure shortdated bonds issued by any kind of solvent commercial, industrial, trade or agricultural enterprise, and in shares of domestic joint stock or limited partnership stock companies. This concession to the German life insurers was of little help for the holders of mark policies, who before 1914 had paid in gold, and after 1922 found there were no bank notes in existence small enough to pay the premiums.

An insured amount of 25,000 marks with which the policyholder in 1918 would have been able to buy a house was insufficient to pay the postal charges which would have been required to send the sum due on a claim to the beneficiary. The inflation of costs had literally eaten up the mark life insurance.

The inventiveness of the insurers in their attempts to continue to operate with fixed values deserves high praise, but the means available were too crude to be successful when the national currency had been abandoned.

Source: "The Business Week Letter," (Vol. VIII, No. 10, Oct. 20, 1975, adopted from chart provided by Fiduciary Trust Co. of New York).

Indexed Family Income Plan

Of Legal and General Insurance Company (United Kingdom)