Buyers eye lower premiums from nat cat reform

The reform raises the prospect of lower insurance rates for risks managers who may also hope to see their claims processed in a more efficient way. But it has also fuelled fears that costs could be generated by an emphasis on the implementation of prevention policies. A workshop dedicated to the subject will gather representatives of the several parties interested in the reform, including France’s insurance association, the French Treasury and Caisse Centrale de Réassurance, CCR, the state-owned reinsurance firm. Risk managers have been encouraged to participate as there are still an opportunity to present ideas for the bill that is currently being prepared by the government.hideAlthough the details of the final draft is not yet known, the major aims of the reform have become clear after the government promoted a consultation process with the market. The focus is on the implementation of measures designed to mitigate property damage caused by natural catastrophes. Companies and public bodies will be urged to adopt such measures with the overall aim of lowering premiums for the mandatory nat cat protection. The general emphasis of the current system will, however, remain untouched. France has one of the world’s most comprehensive regimes to compensate for losses generated by natural disasters currently in place. Every time individuals, companies or public entities purchase property damage insurance, they are required to pay the equivalent of 12% of the premium as a contribution to the scheme. Insurance companies collect the money and purchase buy cat reinsurance coverages from CCR, which enjoys an unlimited guarantee from the state. CCR estimates that the penetration of property damage insurance in the country reaches more than 90%, which means that most French are protected against property damages caused by floods, windstorms and quakes. But the wide scope of the regime may have caused insurance buyers to become complacent when it comes to the adoption of preventive measures that could help to reduce the cost of natural catastrophes, and, as a result, their impact on the public purse. This fact has become evident in recent natural events that hit the country, like windstorm Xynthia, which killed 53 people and caused over €2.5bn of insurable losses when it raged through France in February 2010. “Xynthia hit a coastal region where properties had been built even though the exposure to flood risks was well known,” Jean-Pierre Mefre, director of insurable risks and international reinsurance at Crédit Agricole Assurances, who will host the nat cat workshop in Deauville told Commercial Risk Europe before the event. “It was not the first time that a catastrophic event showed us that people had forgotten about the risks that they were exposed to,” he added. Experts believe that damages cause by Xynthia and other events could have been lower, had more preventive measures been adopted in regions where exposure to natural catastrophes is well documented. But it is believed that not enough emphasis has been given to the subject by large insurance buyers which feel they enjoy enough protection from the current nat cat regime to cover any losses. “The government has concluded that insurance buyers do not have enough financial incentives to invest in preventive measures,” said Pierre Michel, the deputy general director at CCR, who will also take part in the workshop. “The greatest virtue of the current regime is that it guarantees that almost everybody in France enjoys insurance protection against natural catastrophes, and it is financially balanced,” Mr Michel said. “But it can be improved by providing incentives to people to pay more attention to preventive measures,” he said. If current proposals go all the way in Parliament, such incentives would take the form of an opportunity to pay lower ratios of property damage insurance premiums to the nat cat pool. It is not known, however, whether compliant firms will be able to pay less than 12%, or if those that do not comply will have to pay more than that current ratio. According to Mr Michel, such details will be defined by decree once the bulk of the legislation is approved by Parliament. The new system will include only companies of a certain size and public entities. This is because both individuals who purchase home insurance and small companies will be excluded to support the system’s solidarity purposes. AMRAE has expressed support for the idea of boosting prevention and this was discussed at last year’s AMRAE conference. But large insurance buyers fear that the incentives designed to implement new preventive measures will be translated themselves into higher costs for their already stretched budgets. “AMRAE is not against the principle of modulating rates according to the implementation of prevention measures,” Mr Mefre said. “But we want to understand the risks, and we need public bodies to share information with us for a more constructive debate,” he added. Mr Michel argues, however, that the creation of extra costs is not a necessary outcome of the reform.Some of the initiatives that could help nat cat rates fall are simple ones that have more to do with common sense than with fancy, expensive schemes, he told CRE. He gave the example of keeping merchandise on high shelves if the buildings where they are stored are located in regions with a high level of flood risks. In the case of local governments, they can score points by not granting licences to build in regions that are hit by floods. “There are a number of measures that are very simple to implement and could be boosted by a financial incentive to companies and local administrations,” Mr Michel said. An extra perk would be that prevention, if it becomes widespread, would help to reduce losses caused by natural catastrophes, and thereby also mitigate the risks that the financial health of the system comes under pressure during such times of stress. In any case, Mr Mefre expects many companies to have their work cut out for them in order to be eligible for the lower rates. “I am afraid that the work of mapping catastrophic risks remains a pending task for many companies,” he said. “Companies that have activities spread around the world need to perform this exercise in most countries. In France, however, we enjoy a very comprehensive guarantee, and people may think that understanding catastrophic risks and dealing with them is not an urgent thing. In that sense, the reform brings some positive developments,” added Mr Mefre. Insurance buyers and their providers will have to agree on variable rates, which will be given a range, still to be decided, within which variations will be allowed. In order to facilitate the negotiations, a key element of the new regime will be the availability of useful information to buyers and insurers alike. CCR could provide the information because it has gathered data about natural events for a long time in France. “CCR has developed a probabilistic model for exposures to flooding, subsidence and earthquakes in France,” Mr Michel said. “So far, we share detailed information with the state and with insurers, but insurance companies do not make use of it, as nat cat rates cannot be modulated. The reform will help us make our data and model useful to the market, to government authorities in charge of disaster prevention and the public,” he explained. Another possible change is to the definition of the criteria of a catastrophic event. “Today, people who suffer catastrophic losses do not know immediately whether they will be able to make the claims. And that is because they have to wait until the government issues a decree about the state of natural catastrophe in the different regions affected by the events,” Mr Michel explained. “The criteria that the government will apply to issue such decrees are not known by the public. The reform will make these criteria transparent, so that anyone can identify whether an event can be classified as a natural catastrophe,” he added. This would be good news for insurance buyers according to Mr Mefre. “If we have clearer definitions of what constitutes a natural catastrophic event, claims can be processed more efficiently,” he said. The reform is also likely to affect coverage for new constructions that can be affected by subsidence, which can be caused by alternating periods of rain and drought. The current regime enables claims to be made to the natural catastrophic regime in cases of subsidence. But the proposal under discussion establishes that only the owners of buildings that are more than ten years old will be able to lodge such claims. In the first decade after construction, subsidence risks must be covered by the ten-year civil liability insurance that every construction firm needs to purchase for new buildings. Mr Michel said that the goal is to eliminate any overlap between the two mandatory coverages.

Buyers eye lower premiums from nat cat reform

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