Risk managers await changes to France’s nat cat insurance regime

French insurance buyers expect significant changes this year to their country’s nat cat insurance regime, with experts predicting a new system that better rewards risk management and potentially forces more companies to follow mitigation strategies. The changes, which should be presented by the French Government before summer, will aim to guarantee the system’s financial sustainability, with higher mandatory premium or higher deductibles other options. During a visit to Saint-Martin island in the Caribbean in September, French President Emmanuel Macron said his government will present a proposal to reform the country’s nat cat system in the first half of this year. The announcement was made as the French insurance industry faced criticism for delays in paying claims for damages suffered by French territories in the Caribbean during the 2017 hurricane season. Saint-Martin was one of the worst-affected locations in the Antilles. Due to logistical difficulties – such as a breakdown of communication and impossibility of reaching some affected regions for some time – the payment of hurricane claims in the Antilles started rather slowly, picking up pace during last year. By September, one year after Hurricane Irma, 95% of all insured losses, amounting to €1.26bn, had been paid, according to France’s association of insurance companies, the FFA. The association estimates that there were 25,600 claims in the Saint-Martin and Saint Barthélemy islands. CCR, France’s official reinsurer, which provides reinsurance backing to the country’s nat cat regime, calculated that total economic losses caused by Irma in French territories reached €1.96bn. The sheer cost of the damages, coupled with other high-profile catastrophic events such as floods that caused more than €1.4bn of damage in the Paris region during 2016, have raised questions about the ability of the French nat cat insurance system to fulfil its role in times when losses seem more frequent and severe. “We had never seen this kind of thing before,” said Philippe Maraux, director of technical lines at Marsh France, referring to the impact of Irma in the Antilles and recent French floods. “There has been a multiplication of natural events that have put in question the economic sustainability of the system,” he added. France’s nat cat regime is today funded by a 12% mandatory charge that applies to all property damage policies, both commercial and private, written in the country. The fees are collected by insurers that purchase reinsurance from CCR. Sustaining the whole system is an unlimited financial guarantee provided by the French state, which has committed itself to pay for any insured losses that CCR and insurers cannot cope with. The current system was created in 1982, and since then the state guarantee has never been triggered because CCR has always been able to cover even the largest losses from its own reserves. Behind the push for reform lays a fear that climate change is set to make catastrophic events more common, putting the financial capabilities of France’s nat cat protection regime under severe pressure. In a study released last year, CCR estimated that costs related to natural disasters in France will increase by an average of 35% a year until 2050. Floods and drought events are the most likely source of losses, and are already on the rise in France. “There have been ever more natural catastrophes and they have become ever more frequent,” said Virginie Miré, a Paris-based insurance lawyer. “So it is time to update the nat cat system to adapt it to today’s conditions.” The government-owned reinsurer CCR reported last year that it has the capacity to cover natural disasters causing insured losses of up to €4.5bn. In 2017, losses covered by CCR reached €2.2bn, but the organisation fears they could be much higher in the future. It estimates that a major flood of the River Seine could cause damages ranging from €8.8bn to €23.9bn. An earthquake that reaches Nice in the south of France, could cost between €11bn and €14bn, it warns. With these gloomy forecasts in mind, organisations like the FFA and CCR have launched discussions to promote reform of the French nat cat regime. Proposals have been drafted, and some of them may be embraced by the Macron government when it finally releases its own plans. Mr Maraux said the insurance industry would like to see an increase in the current 12% mandatory nat cat rate charged on French property policies, to inject more money into the system. He doubts, however, that such a measure would be well received by consumers, both corporates and individuals. “The only reason why the cat nat system needs to be reformed is to guarantee its economic sustainability,” he said. “Whether it will be done by increasing premium rates, is still to be seen,” he added. Another, more palatable measure would be to provide incentives for policyholders to invest in risk management and mitigation policies, to reduce the financial impact of catastrophic events. The FFA has stated that discussions with the government have focused on fostering better practices to reduce the effect of natural disasters. AMRAE has long supported the concept that mandatory nat cat rates should take into account factors such as the exposure of insured assets and risk management standards. The current system is based on the principle of solidarity, with every property insurance buyer paying the same rates, no matter where they are located. “The idea of boosting prevention is not new, but the plans that have been discussed increase obligations to invest in prevention,” Ms Miré said. She pointed out that since 1995, local governments have been required to draft plans to deal with natural risks, thus assessing the exposure of their territories to floods, earthquakes, wildfires, hurricanes and other events. Today, said Yves Fournier, a broker at Verspieren, companies located in exposed areas that do not follow established prevention policies have to pay higher deductibles in the case of a loss. This type of mechanism could be more widely employed in the reformed regime, he suggested. “One of the possible ways to reduce pressure on the system is to force, or to convince, companies to improve their prevention efforts,” said Mr Fournier. “For example, in the future, facilities located in places with high exposure to nat cat risks may be demanded to adopt stricter prevention measures,” he added.

Risk managers await changes to France’s nat cat insurance regime

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