French government considers further changes to nat cat scheme

The French government said it will look into charging companies a different amount under the country’s nat cat regime based on regional exposure, after experts it commissioned recommended such a move and advised ultimately reducing the levy on business to 16% from the 20% figure set to come into force next year.

In a new report on potential changes to the nat cat scheme, the experts say that an additional €1.3bn a year is needed to withstand the higher frequency of catastrophic events, and recommend a number of risk management changes to boost resilience.

The experts conclude that the maximum extra charge on property insurance premiums, which is currently 12% and will move to 20% for both citizens and business risks next year, should only reach 21% by 2030.

The increase would be made by adding 0.2% to the extra charge every year for five years. After that, the policy would be reviewed to assess whether the refinancing goals are being met.

Corporate risk managers will be interested to hear that this 21% figure is only recommended to apply to home and car insurance premiums. The experts say that the extra charge should be restricted to 16% for business.

The current French nat cat regime is funded by an extra 12% charge on the premiums paid by policyholders of property insurance premiums, and 6% for fire and theft covers. The French government announced in December that the rates will go up to 20% and 9%, respectively, next year, to counter the draining reserves kept by CCR, the state-owned reinsurer that manages the nat cat scheme. CCR reported in March that it made technical losses of €112m last year and had to draw on its reserves for the seventh year in a row in order to balance its books.

CCR paid €1.37bn in claims last year and believes that the number could reach €1.8bn in 2024. It estimates that there is a 15% chance it will have to activate the French state guarantee this year.

Importantly, the report also suggests that the insurance market should be able to apply different nat cat surcharges depending on a region’s exposure.

In “green” zones, where the risk is considered minimal, the rate could be 0%. In “red” zones that face heavy exposure, insurers could charge up to 50% of premium, the report says. It argues that the different charges could be applied as long the average rate stayed with the 12% currently defined by law or 20% from 2025.

Adjusting nat cat charges according to exposure has long been called for by several interested parties, including France’s risk management association Amrae. The French government has committed to study the possibility of implementing different charges following the report’s recommendations.

Next year’s surcharge increase should go some way towards balancing CCR’s books. But the study says that current estimates of future nat cat losses are likely on the low side. According to the authors, which include Thierry Langreney, a former executive at AXA and Crédit Agricole Assurances who now heads an environmental think-tank, changes to the nat cat regime will have to go beyond higher charges on property policies.

They forecast that further financial measures will be required, as well as a number of risk management and education measures to mitigate the exposure of policyholders to more frequent and severe events.

The report stresses that policymakers should do all they can to ensure insurers do not withdraw capacity from French regions exposed to nat cat risks, something that is already happening in places such as Florida and other US states. The report describes this as “major strategic risk” for the impacted economies and the insurance industry.

The report also urges public and private actors to come together and strengthen catastrophic risk management and prevention. It lists a number of tasks that the insurance industry should pursue to help with this. They include broader risk mapping and an obligation to implement measures to improve the resilience of highly impacted regions after a catastrophic event.

The authors also want insurers to provide higher claims payments to make it easier for policyholders to relocate damaged assets. But on the flip side they want to give insurers the right to hold claims payments if asset owners haven’t implemented risk management measures previously agreed with underwriters.

Furthermore, the report proposes measures to encourage insurers to use their underwriting and claims settlement processes to fight climate change. For instance, it wants insurers to adopt policies that replace equipment damaged by catastrophic events with cleaner alternatives.

In total, the report lists 11 main objectives and 37 recommendations to strengthen France’s nat cat regime. The document was drafted with the participation of 150 experts representing five dozen institutions, including insurers, NGOs and academics.

The report was commissioned by the Ministries of Finance and Ecological Transition. The government said after its release that the document will inform moves to adapt its nat cat insurance model and boost risk management policies in the country.

The inaugural ESG Insight and Intelligence Conference will take place in London on 26 June. This event will examine the European regulatory demands associated with ESG, look at the impact on the corporate risk profile and consider how these risks can be managed more effectively. It will also drill down on the increasing demands and disclosures requirements placed upon insurance buyers by insurance carriers. For more information, please visit https://events.commercialriskonline.com/ESG-24